Within 48 hours, the collapse of SVB spun the global economy in a new yet direction
Table of Contents
The Background
SVB Financial Group, commonly known as Silicon Valley Bank (SVB), was a commercial bank with its financial services company headquartered in Santa Clara, California. The bank was founded in 1983 and had since become one of the most prominent financial institutions catering to the technology and innovation sector.
SVB offered a wide range of financial services to its clients, including commercial banking, investment banking, private banking, asset management, and wealth management. Its clients include technology and life science startups, venture capital firms, private equity firms, and corporate clients.
The bank had a strong presence in the United States, with offices in major technology hubs such as Silicon Valley, San Francisco, Boston, New York, and Seattle. It also had a growing international presence, with offices in the United Kingdom, Ireland, Israel, China, and India.
SVB had been recognized as one of the best banks for startups and emerging companies, with a reputation for providing customized financial solutions to its clients. Its success was driven by its focus on innovation, customer service, and strong relationships with its clients.
Sequence of Events
On Friday, 10 March 2023, the world witnessed the largest bank failure since 2008, when SVB shut down within the timeline of events of 48 hours. On March 8, The bank sold around $21 million in securities with a plan to re-invest it which would result in an after-tax loss of $1.8 billion in the first quarter. Bloomberg then reported, the bank had announced offerings, for $1.25 billion of its common stock and $500 million of securities, which represented convertible preferred shares. Consequently, the SVB shares plummeted by 41%.
This was a result of SVB’s announcement that it had sold all of its available-for-sale securities in its portfolio and had also updated its forecast showcasing a sharp decline in its net interest income. However, the SVB shares further plunged and started trading at $63.99. This was alarming and led to the halting of SVB shares after a sharp sell-off in pre-market trading.
Eventually, SVB met its dooms day when the California Department shut down the bank, with about $175 billion of deposit at stake. This was the largest bank failure since 2008. With heavy reliance on institutional/VC funding rather than traditional retail deposits, accompanied by US Fed’s policy rate, SVB found itself, making cracks in its liability.
SVB led a distinct and riskier niche than other banks, eventually setting itself up for large potential capital shortfalls in case of rising interest rates, deposit outflows, and forced asset sales.The U.S Authorities have assured that the investors would have access to their deposits.
Aftermath
On Sunday, the British government was frantically working to limit the harm to the nation’s tech industry. The British government is attempting to find a way to lessen the potential damage to businesses caused by the failure of SVB’s UK subsidiary, according to Prime Minister Rishi Sunak.
As bankruptcy approaches, advisory firm Rothschild & Co is looking at options for the subsidiary, according to two people involved with the talks who spoke to Reuters. According to the BoE, it is requesting a court order to put the UK arm through an insolvency process.
Considering the bank was a crucial funding bridge for organizations working between China and the U.S., the SVB bankruptcy has left many Chinese funds and digital start-ups in Asia stranded, the Financial Times said on Sunday. The Chinese joint venture of SVB said on Saturday that it has a reliable corporate structure and a balance sheet that is managed independently.
Investors are debating if the instability in the banking sector could prompt central banks to rethink their policies after expectations for more interest rate increases in the United States and Europe increased.
Investors’ attention will be riveted on the ECB, which appears poised to announce another significant interest rate increase on Thursday. The unexpected increase in underlying inflation in February has policymakers concerned that pricing pressures may turn out to be enduring. According to European economist Marchel Alexandrovich, a partner at Saltmarsh Economics, the ECB will keep an eye out for any contagion concerns and ensure that liquidity is abundant in the system.
Also, he said, ECB President Christine Lagarde would “give a somewhat more cautious message” if the markets have a challenging week.
The SVB scandal in Britain might overshadow UK Finance Minister Jeremy Hunt’s budget. Hunt is anticipated to prioritize maintaining stable state finances by opposing giveaways that would undermine the value of the pound, equities, or gilts.
Yet, the prognosis for government bonds is uncertain due to broad expectations for new public borrowing needs.
Read More: Silicon Valley Bank down, Signature Bank to join the turmoil
The collapse of Silicon Valley Bank (SVB)
