Here's what you need to know about Silicon Valley Bank's collapse and its impact on the financial sector.
If you have not heard of Silicon Valley Bank (SVB), you might be wondering what the impact of the bank’s collapse on financial markets might be.
SVB’s failure is significant as it is the largest bank failure in the US since the global financial crisis.
Let’s take a deeper look to understand more about what happened and what to look out for from here.
What you need to know about the Silicon Valley Bank collapse
#1 – Silicon Valley Bank is a US bank that served many tech startups
Silicon Valley Bank (SVB) served mainly startups and investors active in the industry. According to the company, it serves nearly half of all US venture-backed startups.
Notable companies that are customers of SVB include Roku, Roblox, Pinterest and Shopify.
SVB was the 16th largest bank in the US prior to its collapse, according to the Federal Reserve.
The bank had US$209 billion of assets as of 31 December 2022. To put this in context, its asset base is less than 10% of that of JP Morgan.
#2 – Financial difficulties faced due to bank’s balance sheet structure
SVB’s deposits grew in recent years as customers raised more capital during the tech boom.
With the low interest rates it could earn with shorter duration bonds, SVB put the cash into longer-term bonds.
The value of these long term bonds fell as interest rates went up (remember the price of bonds go down as interest rates rise). SVB was sitting on mark-to-market losses of more than US$15 billion as at end 2022, close to its entire equity base of US$16.2 billion.
To improve its balance sheet, SVB decided to sell part of its portfolio and raise $2.25 billion of equity.
The news caused many depositors and venture capital firms to panic. Peter Thiel’s Founders Fund and other high profile VC firms advised their portfolio companies to withdraw money from the bank.
The share price of SVB plummeted by more than 60% on Thursday, causing the firm to abandon its plans to raise capital.
US regulators then stepped in and put SVB under receivership under the Federal Deposit Insurance Corp.
#3 – Concerns on contagion impact
Coming at the back of the collapse of Silvergate bank, which served largely the cryptocurrency industry, there are naturally concerns that the fall of SVB could lead to a knock-on impact to the financial sector.
The share prices of US banks fells sharply with the news of challenges faced by SVB. The KBW Bank Index, which tracks the performance of leading banks in the US, fell 16% in the past week as concerns grew over the collapse of SVB.
The most significant impact so far appears to be felt on startups with deposits with SVB.
As the FDIC insures bank deposits of up to $250,000, and SVB’s clients had much more, close to 93% of domestic deposits was uninsured as of 31 December 2022.
The second largest stablecoin in crypto – USDC, fell due to the exposure of its issuer Circle to SVB. The coin is supposed to be fully backed by reserves of cash and short dated Treasuries. However, about $3.3 billion of the $40 billion reserve is with SVB.
What would Beansprout do?
The collapse of SVB reflects challenges faced by various sectors of the economy with higher interest rates. However, some of the difficulties faced appears to be felt more acutely by the SVB.
For example, it served a narrow set of companies largely in the same industry. A significant portion of deposits were also not covered by FDIC insurance, which made it more susceptible to a bank run.
Other banks could also face unrealized losses on their bond portfolios. However, these bond portfolios are likely to be a smaller portion of their asset base.
For now, there are still several ways that the collapse of SVB could play out.
The collapse of SVB could weaken sentiment. If banks were to become more conservative with their lending activity, there might be further slowdown in the economy.
There are already expectations that the Fed might be less aggressive on its interest rate hikes following the collapse of SVB.
However, the impact on the economy will still depend largely on whether a buyer will emerge to buy over SVB.
This is something investors are watching out closely for before SVB’s main office and branches reopen on Monday.
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