Silicon Valley Bank, one of the most popular commercial banks in the United States, has collapsed, causing fears among customers, banks and the banking sector. The Bank was forced to sell its bonds at loss, causing customers to panic and withdraw their savings in large quantities. In a few hours, the bank was already on the brink of total collapse until the regulatory bodies and the United States government came to its rescue.
Until its collapse, the Silicon Valley Bank was the 16th largest commercial bank in the United States, providing banking services to about half of all US venture-backed technology and life science companies.
Apart from the United States, the bank also operates branches in the UK, Germany, Canada, Denmark, China, Ireland, Sweden, and Israel.
The commercial bank experienced unprecedented growth in recent years due to advancements in the technological sector, especially during the pandemic when there was high demand for digital services.
From 2019 to 2022, the bank’s assets did not only double but tripled from $ 71 billion to $200 billion, according to financial statements. Deposits also skyrocketed from $62 billion to over $198 billion during the same time.
Why the Bank collapsed
SVB, as the Bank is fondly called, saw its end in a few hours when customers decided to withdraw their deposits for fear that they might lose them. Why were these customers scared to the extent of losing trust in the Bank?
The problem dates back many years. In the past, when the interest rate was near zero, SVB invested billions into United States government bonds. Although the decision was perfect at that time, things turned around quickly, and the almost perfect investment decision soon became a disaster.
As the US and the rest of the world battle inflation, the Federal Reserve significantly hiked interest rates. Interest rates and the price of bonds do not rise or fall at the same time. When one falls, the other rises. The interest rate hike soon affected the price of SVB’s bonds adversely, eroding their value significantly.
The portfolio was yielding an average 1.79% return last week, far below the 10-year Treasury yield of around 3.9%, Reuters reported.
The continuous hiking of interest rates means the cost of borrowing will also be on the increase. Tech companies had to spend more on repaying debts while trying to raise new venture capital funding. These companies were forced to draw down on deposits held by the Bank to fund their operations and growth.
Although the Bank’s problems have been accumulating for quite some time, an announcement was made on Wednesday that triggered panic among customers. It said it sold a bunch of securities at loss and would sell $2.25 billion in new shares to make up for the deficit in its finances.
That one announcement caused panic among customers, who hurriedly withdrew their money in large quantities. By Thursday, the bank’s stock was down by 60% and by Friday, trading of SVB shares stopped. To save the dying horse, California regulators intervened and shut down the bank before placing it under receivership under the Federal Deposit Insurance Corporation. In other words, the bank’s assets were liquidated to pay back depositors and creditors.
Unfortunately, the collapse of SVB also affected the stock of other banks. As of Thursday and Friday, the situation seems to have sent stocks of other banks down and the effect was also seen on the crypto market. This development has caused many to wonder if their deposits in the bank and other banks are safe.
No need to panic, customers’ deposits are safe
The United States government and regulatory bodies have assured customers of Silicon Valley Bank that their deposits are safe and that customers of other banks would also be protected.
“Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system,” a joint statement by the Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation reads. “This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.”
The statement assured customers that “no losses will be borne by the taxpayer,” adding that “shareholders and certain unsecured debtholders will not be protected.”
Following the crisis, the regulatory bodies announced the dissolution of the senior management of the bank.
President Biden, in a statement on Monday, reiterated the words of the regulatory bodies, saying deposits are safe and that the government will do everything within its powers to ensure the safety of the banking system.
Today, thanks to the quick action of my administration over the past few days, Americans can have confidence that the banking system is safe. Your deposits will be there when you need them,” Joe Biden said. “Small businesses across the country that had deposit accounts at these banks can breathe easier knowing they’ll be able to pay their workers and pay their bills. And their hardworking employees can breathe easier as well.”
Those responsible would be held accountable
Following the dissolution of the entire management of Silicon Valley Bank, president Biden has vowed to hold those responsible for Bank’s collapse accountable for their actions.
“I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again,” Biden said.
He acquitted his administration and that of Obama from the current crisis but subtly fingered his predecessor, Donald Trump, for making policies that made banks vulnerable. He promised not to let small businesses down at this time.
Will there be a banking crisis?
Already, there have been signs that there could be a major banking crisis in the United States and Europe. Following the crisis at SVB, shares of various banks have been negatively affected, raising concern that a financial crisis might be just ahead.
Additionally, SVB was not the only bank in the situation that led to the collapse of the bank. Other commercial banks had invested in government bonds and have lost a significant value of their assets. According to the FDIC, at the end of last year, banks in the United States were sitting on $620 billion in unrealised losses.
“The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies,” Martin Gruenberg, FDIC Chairman, said. “Unrealized losses weaken a bank’s future ability to meet unexpected liquidity needs.”
To prevent another situation like that of the SVB, the Federal Reserve said it would make funds available for financial institutions for their safety.
However, most financial analysts believe bank securities have been strengthened since the global financial crisis in 2008. They also argued that SVB is more vulnerable compared to other banks because of its exposure to the tech sector.
Mark Zandi, the chief economist at Moody, said: “The system is as well-capitalized and liquid as it has ever been. The banks that are now in trouble are much too small to be a meaningful threat to the broader system.”
Are Silicon Valley Banks in other countries affected?
Since Silicon Valley Bank operates in other countries across Asia and Europe, there are also worries that they could be affected by the dramatic turnaround. However, there is very little or no sign that these banks are shaken.
Prime Minister of the UK, Rishi Sunak, has assured his people that they have nothing to worry about as their banks are well-capitalised and liquidity is strong.
“Our banks are well capitalised, and the liquidity is strong,” Sunak, who is in the United States, told ITV.