Silicon Valley Bank (SVB) Collapse
Silicon Valley Bank is a financial institution based in Santa Clara, California that provides a range of banking and financial services to technology companies, venture capitalists, and private equity firms.
SVB was offering a variety of services, including corporate banking, investment banking, private banking, and asset management, and is known for its focus on providing specialized financial services to startups in the technology sector.
At the end of 2019, the bank had roughly $62 billion in deposits, which grew to $190 billion by the end of 2021. This excess of liquidity pushed the bank to buy financial assets.
Around $80 billion were invested, a big part of it was in 10-year maturity mortgage-backed securities.
By the end of 2022, the bank had approximately $209.0 billion in total assets and around $175.4 billion in deposits, according to US officials, and it was the 16th largest US bank by asset size.
In other words, SVB used customer deposits to finance its investments. At that time, mortgage-backed securities yielded 1.5% while US Treasuries yields were between 0-0.25%.
Unfortunately, those investments were not hedged, and the bank was fully exposed to interest rate fluctuation risks. The only situation that could put SVB under pressure was if many customers wanted to withdraw their funds simultaneously.
While this situation was very unlikely to happen, the recent aggressive monetary policy adopted by the FED by rising interest rates at a rapid pace to fight inflation, pushed long-duration bonds to decline and SVB financial assets holdings to become “underwater” (an asset that is worth less than its notional value).
In addition, Silvergate Bank, one of the largest cryptocurrency banks in the US, has announced it is going into liquidation which raised a red flag for SVB’s investors. The bank took a loss of $1.8 billion after selling a part of its securities and disclosed its intention to raise more capital to bolster its financial position.
However, it was not enough to give confidence to its depositors who began to withdraw funds massively. This situation forced the bank to sell its underwater assets at a loss to keep up with rising withdrawal requests.
On Friday the 10th, SVB was closed by the American authorities, this announcement caused a big panic in the banking sector in the United States and all over the world as this is the biggest bank failure in the United States since the 2008 financial crisis. The collapse started after SVB failed to cope with massive customer withdrawal requests, mainly from tech players.
In addition, the control of SVB deposits has been entrusted to the Federal Deposit Insurance Corporation (FDIC), which intends to reopen on Monday the 17 branches of the bank, deployed in California and Massachusetts.
The FDIC also plans to allow customers to withdraw up to $250,000, the amount normally guaranteed by the agency, while other customers with higher deposits will have to contact the FDIC. As mentioned earlier, the panic began on Thursday when the bank announced that it was looking to raise capital quickly to meet a massive bank run.
SVB shares were down 60%, and that massive drop weighed on the financial sector stocks. JPMorgan Chase was down 5.4 percent, Bank of America, and Wells Fargo both fell 6.2 percent, while Citigroup fell by 4.1 percent. US banks lost a total of $52 Billion in market value fueled by investors’ fear.
Moreover, US Treasury Secretary Janet Yellen called several financial sector regulators on Friday to discuss the situation, reminding them that she had “full confidence” in their ability to take the indicated actions and revealed that the banking sector remains “ resilient “.
To conclude, we can say that SVB’s collapse is mainly due to the absence of proper risk management, in addition, the ongoing FED monetary policy was also a key factor in SVB’s failure. For the time being, higher interest rates are likely to weigh negatively on the economic outlook.
Therefore, the stock market is expected to remain under pressure in the near term on rising concerns about potential new companies failing in the coming weeks.