The 48-hour collapse of Silicon valley Bank

On March 10th 2023, the $200bn company ‘Silicon Valley Bank’ (SVB) collapsed, making it USA’s largest bank failure since the 2008 financial crisis.

The story behind the collapse

During the pandemic SVB’s services were heavily demanded. The overwhelming market shock that COVID-19 brought resulted in a hot period of growth of digital start ups, and inevitably exponential growth for well established tech companies. With SVB already having a strong reputation in the technology industry, growth of associated firms resulted in a large influx of deposits. SVB’s role was to look after and hold the cash that these tech firms used for payroll and other business expenses. As banks do, SVB decided to move the cash they had received elsewhere. However, in SVB’s case, it could be argued that they invested this money in the wrong place, or at the wrong time, or maybe in the wrong quantities. SVB decided to invest heavily in long-dated US government bonds, which are generally perceived as being a safe move. However, a problem arose when the Federal Reserve decided to rapidly increase interest rates in an attempt to combat the inflation present in The US economy. Bond prices have an inverse relationship with interest rates, which inevitably created problems for current, older bond holders (in this case SVB). This is because as interest rates rise, new bonds are issued with higher yields (return to an investor from the bond’s interest), which makes the older bonds less attractive, causing their value to fall. Thus, the value of US government bonds that SVB had invested in had fallen. Simultaneously, economic market conditions changed dramatically, with many tech companies being especially affected. Consequently, many of SVB’s customers (tech firms and start-ups) began withdrawing their deposits, in order to keep their companies afloat. But, SVB did not have enough cash on hand to return the deposits, as they had invested too much into government bonds. To be able to pay back these firms quickly, SVB started selling some of its bonds at a total significant loss of $1.8bn. On March 8th, SVB announced its capital raising (selling bonds). Following this, fear was struck into investors and customers of SVB, alarming them that there were deep financial problems at SVB (They were extremely low on capital). As rational economic agents, the uncertainty resulted in investors and customers rapidly withdrawing their deposits. The herd mentality meant that more and more agents withdrew their deposits from the bank, until the bank officially collapsed on March 10th, just two days after their capital raising. The swift bank run can be attributed to the fact that SVB’s clients tended to have much larger accounts, unlike a usual retail bank. This meant that fewer clients (compared to a retail bank) had to withdraw their deposits for the bank to subside.

What has happened since the collapse?

The US Government decided not to save/bail out SVB, leaving it collapsed until another buyer can bring it back to life. However, on March 12th, US Financial Regulators did extend a guarantee to cover all deposits at the bank, meaning that all customers of SVB would be able to access their money the next day.

Elsewhere, The UK operations of SVB has been rescued. Shortly following the collapse on March 10th, HSBC decided to buy Silicon Valley Bank UK for £1 in a rescue deal. This saved thousands of British tech startups and investors from the monumental losses they may have faced. Despite the debt that this acquisition would place upon HSBC, they saw this purchase as making ‘Excellent strategic sense for our business in the UK’ and that ‘It strengthens their commercial banking franchise and enhances their ability to serve innovative and fast growing firms’ – Noel Quinn, HSBC Group CEO. Ultimately, the rescue from HSBC is a risk, but has the ability to create even greater success for HSBC’s banking franchise in the UK.