Alice Thébault
Silicon Valley Bank (SVB), America’s 16th biggest lender, collapsed on March 10th and was taken over by federal regulators. Initially, little interest was shown by other banks worried about the damage a takeover could incur on their own balance sheets. More recently, it has been announced that First Citizens Bank, the self-proclaimed “nation’s largest family-controlled bank”, is set to acquire much of the failed bank and will henceforth operate its 17 branches. Impact’s Alice Thébault reports.
SVB was established in 1983 and is headquartered in Santa Clara, at the heart of Silicon Valley. Holding around $200 billion in assets, the self-titled “financial partner of the innovation economy” has long prided itself in its close ties to the tech community, specifically young, risky startups. “If you’re a venture capitalist or start-up company, it’s fair to say in some way, shape or form, SVB touched every part of your business,” Chris Olsen, an investor at the venture firm Drive Capital, said.
“Americans can have confidence that the banking system is safe”
Seeking to drive profitability with the excess liquidity it experienced in 2021, SVB purchased assets that it considered ‘safe’ with the deposits of venture capital investors and tech start-ups, who prospered during the pandemic. These were low-interest, low-risk long-term investments, which included U.S. Treasury bonds. Against the backdrop of a rise in the Federal Reserve’s rate, from 0% about a year ago to 4.75% and even rising to 5.00%, the value of those assets took a hit.
With news of the bank’s loss on its investments spreading across social media, group chats and emails, customers grew wary of SVB’s ability to pay out deposits, which in turn led to a “bank run”. Around 95% of SVB’s deposits were uninsured at the end of last year, exceeding the $250,000 covered by Federal Insurance, hence why there was a great incentive for customers to quickly withdraw their assets from the bank. For most major US banks, this figure sits at around a third of all deposits. In the space of a day, withdrawal requests amounted to $42bn, not all of which could be honoured, leaving companies scrambling to meet payroll.
It remains to be seen whether further financial turmoil is looming
Although the government’s protection of all deposits at SVB suggests other banks’ customers would be entitled to the same safeguards in the event of failures, anxiety remains over the health of the financial system as a whole, despite President Biden’s assurance that “Americans can have confidence that the banking system is safe.”
Wider distress in the banking system was made apparent when, earlier this month, New York’s Signature Bank (SB) was dealt an equally lethal blow by a run on the bank. In Europe, a week after SVB’s collapse, Crédit Suisse (CS) found itself in need of stabilising and rescuing from insolvency.
On Sunday, March 19th, a $3.25bn emergency deal was struck between CS and its local rival, UBS, with the latter pursuing the integration of the troubled Swiss bank. The rescue deal was orchestrated by Swiss authorities as market confidence was shown to be unrestorable. Such a “swift and stabilising solution” as UBS’s takeover of CS, “was absolutely necessary” in the face of liquidity outflows and market volatility, according to Swiss president Alain Berset. This comes after years of dwindling investor and customer trust in CS, which hit an all-time low with the demise of SVB and SB as contagion fears spread.
It remains to be seen whether the full effects of the SVB crisis have reverberated throughout the global banking system, or whether further financial turmoil is looming.
Alice Thébault
Featured image courtesy of Mariia Shalabaieva via Unsplash. Image license found here. No changes were made to this image.
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