The news of the collapse of Silicon Valley Bank recently has sent waves globally, raising worries of a looming US banking crisis. People ask how and why did it happen to one of the largest financial institutions in the country?
SVB started up in 1983 as a bank dedicated to serving early-stage technology companies. It financed approximately half of the American venture-backed healthcare and tech startups.
According to the FDIC, SVB was one of the top 20 US commercial banks with $209 billion in overall assets as of the end of last year.
Shadows of the US Financial Crisis of 2008
Simply put, a typical bank panic caused SVB Collapse.
The Federal Reserve was the first to take action, beginning a year ago with interest rate hikes intended to curb inflation. Tech equities that had benefitted SVB were hurt by the Fed's aggressiveness and increasing borrowing prices.
SVB and other banks bought long-term bonds at ultra-low, near-zero interest rates, but rising rates devalued them.
With a total value of $21 billion, SVB's bond portfolio was generating an average yield of 1.79%, much below the current yield of 3.9% on 10-year Treasuries, according to a CNN report.
Moreover, venture money started drying up, forcing businesses to dip into SVB's reserves. The bank had a pile of unrealized bond losses as consumer withdrawals increased.
To strengthen its financial position, SVB said on Wednesday that it had sold several instruments at a loss and would be selling a total of $2.25 billion in new shares. Venture capital firms panicked and urged clients to pull their deposits from the bank
As investors worried about a rerun of the US financial crisis of 2007-2008, the bank's stock started falling on Thursday morning and continued to drive other bank shares downwards by the afternoon.
By Friday morning, SVB had given up on trying to swiftly raise funds or find a buyer, and trading in its shares was suspended. Silicon Valley Bank was closed by California authorities, and the FDIC acted as the receiver, as per a previous HNGN report.
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The swift action of the US government in guaranteeing the deposits of the banks' clients has controlled immediate fears of global contagion following the Silicon Valley Bank failure.
Speculative financial instruments are known as "financial futures" saw a surge in demand for US technology stocks after the assurances were made.
There were worries that SVB account holders wouldn't be able to pay their workers if the guarantee wasn't put in place, which would have had a domino effect across the economy.
Prof. Fariborz Moshirian,of UNSW, who is also a director of the Institute of Global Finance, noted that "supply chain consequences" were prevented in "terms of stability" after the SVB Collapse, per The Guardian.
Safeguarding the Financial Sector
Countries all around the globe are looking into whether or not their business and financial sectors have been exposed to Silicon Valley Bank, and this includes the United Kingdom and Australia.
Sunday, banking authorities came up with a strategy to protect Silicon Valley Bank depositors' funds, an essential move toward preventing the widespread panic that was predicted in the wake of the bank's failure.
Officials authorized a series of measures over the weekend that would allow depositors at the defunct SVB to regain complete access to their funds.
On Monday, all depositors will have unrestricted access to their accounts.
SVB was deemed a systemic risk by the Treasury Department, permitting it to liquidate the institution in a manner that completely safeguards all depositors.
Many depositors, owing to the $250,000 limit on insured accounts, will be compensated from the FDIC's deposit insurance fund.
Meanwhile, the Federal Reserve announced the launch of a new Bank Term Financing Program to cushion the blow to financially stable institutions from the Silicon Valley Bank failure effect on the market.
In a joint statement, the several US authorities involved assured the public that the new plans would not need bailouts or incur any expenses to the taxpayers. Some unsecured creditors and shareholders will lose all their investments, CNBC reported.
Federal Reserve Chair Jerome Powell, Treasury Secretary Janet Yellen, and FDIC Chair Martin Gruenberg said in a joint statement on the SVB collapse: "Today we are taking decisive actions to protect the US economy by strengthening public confidence in our banking system."
