Silicon Valley Bank (SVB), as the name implies, is a commercial bank based in Silicon Valley. It provides commercial and investment banking, asset management and private banking to tech startups, venture capitalists, and private equity firms.
Founded in 1983, SVB became one of the most prominent banks serving the technology industry. Before its collapse, it was the 16th largest bank in the United States and the largest by deposits in Silicon Valley.
A timeline of SVB collapse
The story of Silicon Valley's biggest bank is more complex than you would expect it to be. Its collapse can be attributed to a sequence of events happening over the course of five years, causing a domino effect.
The first domino piece to fall was the COVID-19 pandemic. As countries implemented lockdowns and safety protocols to protect their citizens, supply chains broke down, and the world plunged into an economic crisis for most of 2020. To mitigate this, the Fed lowered its interest rates to help keep the economy alive.
With interest rates low, US venture capital-backed companies, SVB's primary clientele, raised a whopping USD 330 billion in investments. SVB received a huge chunk of these deposits, increasing its holdings by 100% in 2021. To maximise earnings, SVB used client deposits to purchase long-term bonds.
Unfortunately for SVB, in 2022, the Fed aggressively increased interest rates to battle inflation. The rates climbed from 0-0.25% at the start of the year to 4.25-4.50% by the end of 2022.
The high-interest rates caused bonds to decrease in value. At the same time, startups saw less funding from venture capitalists, forcing firms to withdraw their deposits from SVB to stay liquid.
SVB was then left with a massive problem on its hands. Clients wanted to withdraw their money, but SVB already invested it in long-term bonds, which were depreciating at the time.
SVB was forced to liquidate its bond portfolio to meet client withdrawal requests. On 8 March, the bank announced that it sold USD 21 billion worth of securities, absorbing a USD 1.8 billion loss. They also declared they would issue USD 2.25 billion worth of new shares to raise capital.
This caused widespread panic among venture capital firms, most of which advised companies to withdraw their money from SVB, ultimately creating a bank run with investors and depositors trying to pull USD 42 billion – about 25% of the bank's total – in one day.
On 9 March, SVB's stock price (SIVB) lost over 60% of its market value, dropping from its closing price last 8 March at USD 267 to USD 106. The following day, trading was halted after it tumbled 66% during premarket trading.
On 10 March, the California Department of Financial Protection and Innovation closed SVB. This marked the second-largest bank failure in US history.
On 13 March, HSBC announced that its UK subsidiary would acquire SVB's British unit for GBP 1. The deal will not include the assets and liabilities of SVB.
How will SVB's collapse affect the markets?
SVB was the second-largest bank failure in US history after Washington Mutual in 2008. This triggered traders and investors to panic sell on all financial markets, with bank stocks plummeting as investors feared a repeat of the 2007-2008 financial crisis. All major indices also took a hit.
When investors avoid high-risk securities like stocks, safe-haven assets, such as gold, increase in value. Gold's spot price saw a 2.06% increase on Friday, the highest intra-day gain since November 2022.
How will it affect future markets?
The impact of a single bank failure on the broader financial market can depend on various factors, including the size and interconnectedness of the bank, the cause of the failure, and the overall state of the economy and financial system.
As most banks are insured by the Federal Deposit Insurance Corporation (FDIC), the collapse of a single bank, like SVB, is unlikely to impact the broader financial system significantly. However, with inflation and the Federal Reserve continuing rate hikes, the systematic risk of the financial system should be addressed.
On the other hand, mid-sized banks that are more exposed to specific industries or customer types, especially tech startups and the cryptocurrency industry, are more likely to face the turmoil of SVB collapse.
With the fear of systematic risk and high-interest rates in play, we are more likely to see a continuation of gold's appreciation in value.
CFD traders could take advantage of the current situation by considering shorting stocks and indices they believe will be affected by SVB's collapse. Going long on safe-haven assets such as gold might also be a lucrative option. CFDs allow traders to trade on the price movements without owning the underlying asset, clearing them of any liability should legal issues arise.
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