Yet another US bank bites the dust. On Friday, March 9th, 2023, the US banking regulator closed the Silicon Valley Bank after it became insolvent. SVB’s collapse happened within 48 hours when customers caused a bank run withdrawing $42 Billion in a single day.
Like many other banks, SVB had invested heavily and put billions into US government bonds when interest rates were near-zero. As soon the Fed started hiking interest rates, SVB’s asset value in govt bonds began declining.
SVB Becomes Second Largest Banking Failure in the US after Lehman Brothers
The collapse of Silicon Valley Bank (SVB) in Santa Clara, California, marks the second-largest banking failure in US history and the largest since the Global Financial Crisis.
As a depositor, you can take comfort in the US government’s protection of deposits, funded by a special impost on banks rather than taxpayers. However, shareholders will not receive protection. The current situation resembles the Great Depression, with bank runs and failures occurring despite the Fed’s rate hikes. But what led to SVB’s collapse?
What triggered SVB collapse?
Bad deposits.
That’s what caused the collapse of Silicon Valley Bank. Most of its deposits were in US government bonds, with a near-zero return. Once the interest rates increased, SVB’s deposits started diminishing in value. As a twin issue, its depositor-based (or customer based) consisted of startups, venture capital funds, and the broader Silicon Valley ecosystem proved to be a disastrous strategy.
The deposit base was highly concentrated, leading to a steady increase in withdrawals, particularly during the pandemic when VC funds tightened their belts and enterprise sales slowed down. As a result, the bank had to pay higher rates to retain depositors or rely on more expensive external funding sources. This cost increase led to a surge in withdrawals, ultimately causing the bank to collapse.
President Joe Biden Reassures Citizens
The US government has intervened to secure customer deposits, but SVB’s collapse’s effects are still felt worldwide. Additionally, Signature Bank, another bank on the brink of failure, has been closed down, and the government has secured deposits. US President Joe Biden has reassured citizens that their banking system is safe and that they will take any necessary action. This is the most significant US bank failure since the global financial crisis.
The BBC reported that global bank stocks slumped in Europe and Asia despite the president’s and the governor’s assurances.
Governor Newsom also took to Twitter and shared his message about the Silicon Valley Bank episode.
Fed to Release Review of SVB’s Failure by May 1
The Federal Reserve announced in a press release that it would release the review of SVB’s failure by May 1 under the Vice Chair for Supervision Michael S. Barr.
What’s Next for Silicon Valley Bank?
Over the weekend, there was a race against time to save the UK arm of Silicon Valley Bank from total collapse. After discussions between government officials and banking executives, it was decided that HSBC Holdings Plc would acquire the bank’s UK unit.
This deal marks the end of a frantic weekend for those involved as they explored various strategies to avoid the bank’s downfall. The acquisition by HSBC brings some relief, as it helps to avert a potential banking crisis and provides stability to the financial markets. It remains to be seen how this acquisition will impact the UK banking sector in the long run, but it is a welcomed solution to a severe problem for now.
As for the US arm of SVB, Reuters reported that JP Morgan is among the top contenders to buy Silicon Valley Bank.
According to sources familiar with the matter, JPMorgan and PNC are among the potential suitors in talks to acquire SVB Financial Group in a deal that would exclude the commercial bank currently under U.S. government control.
Axios
Wrap up
Despite reassurances from the top, market signals indicate that banks will have a hard time in the coming months. Credit rating agency Moody’s cut the outlook on the U.S. banking system to negative. This is a developing story, and we will publish a follow-up news report on developments around the SVB default.
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