Overview
Silicon Valley Bank, one of the top 20 American commercial banks, faced a sudden bank run and capital crisis on Friday morning, resulting in the bank’s collapse.
The Bank’s History
Founded in 1983, SVB specialized in banking for tech startups, providing financing for almost half of US venture-backed technology and healthcare companies. The bank had $209 billion in total assets at the end of last year.
What Led to the Bank’s Failure
Several forces collided to take down the banker, including the Federal Reserve’s raising of interest rates, which sapped the momentum of tech stocks, and the drying up of venture capital, forcing startups to draw down funds held by SVB. The bank was also sitting on a mountain of unrealized losses in bonds just as the pace of customer withdrawals was escalating.
The Result
On Wednesday, SVB announced it had sold a bunch of securities at a loss, and that it would also sell $2.25 billion in new shares to shore up its balance sheet, triggering a panic among key venture capital firms. The bank was taken over by federal regulators.
Experts Say Another Financial Crisis Unlikely
The recent collapse of Silicon Valley Bank (SVB) has sparked concerns about a potential repeat of the 2007–2008 financial crisis. As SVB’s stock began to plummet, investors grew increasingly worried about the possibility of a domino effect throughout the banking industry. However, analysts have pointed out that the current situation is vastly different from that of 2008.
Despite being forced into receivership under the Federal Deposit Insurance Corporation, SVB’s collapse is unlikely to trigger a widespread contagion effect. Moody’s chief economist Mark Zandi highlighted that the current system is well-capitalized and liquid, minimizing the risk of a broader crisis. The FDIC has also assured insured depositors that they will have full access to their insured deposits by Monday, and uninsured depositors will receive an advance dividend within the next week.
However, smaller banks that are closely tied to struggling industries such as tech and crypto may face difficulties in the aftermath of SVB’s collapse. As senior market analyst at Oanda, Ed Moya, explains, the recent events may be a result of the Fed’s rate-hiking campaign, which has finally broken something. While the banking system is stable, smaller banks may experience turbulence due to their exposure to high-risk industries.
Overall, the collapse of SVB has echoes of the 2008 crisis, but the differences in the current system and regulatory measures in place suggest that a repeat of history is unlikely. Nonetheless, it is essential to monitor the situation and be prepared for potential repercussions in the smaller banking sector.