Silicon Valley Bank Collapsed at breakneck speed on Friday. While the U.S. federal government stepped in to guarantee customer deposits, its collapse continued to reverberate through financial markets around the world — as seen with the subsequent collapse of Signature Bank — and investors worried whether its collapse would trigger a broader banking meltdown.
Lord’s what you need to know On the largest U.S. bank failure since the 2008 global financial crisis:
Why is it crashing? : The roots of its demise go back a few years.like many Compared with other banks, SVB has invested billions of dollars in U.S. government bonds in an era of near-zero interest rates. Seemingly safe bets quickly became off the table as the Federal Reserve sharply raised interest rates to curb inflation.
When interest rates rise, bond prices fall, so rising rates erode the value of SVB’s bond portfolio. The portfolio averaged a yield of 1.79% last week, well below the 10-year U.S. Treasury yield of around 3.9%, according to Reuters.
At the same time, the Federal Reserve’s rate-hiking spree has pushed up borrowing costs, meaning tech startups have to use more cash to pay down debt. At the same time, they are trying to raise new venture capital funding. This forced the company to tap deposits held by SVB to finance its operations and growth.
Then the bank runs: When SVB announced that it had sold a large number of securities at a loss and would sell $2.25 billion in new shares to plug its financial hole, clients panicked and pulled their money.
The bank’s shares plunged 60% on Thursday and dragged down other bank stocks. By Friday morning, trading in SVB’s shares was halted, and it had abandoned efforts to raise capital or find a buyer. California regulators intervened, closing the bank and placing it under FDIC receivership, which usually means liquidating the bank’s assets to pay depositors and creditors.
To prevent further bank runs and help companies pay their employees and fund operations, US regulator explain On Sunday they will guarantee the deposits of all SVB customers. However, the intervention is not equivalent to a 2008-style bailout, meaning investors in the company’s shares and bonds will not be protected.
Will this trigger a banking crisis? There are already some signs of stress at other banks, and authorities in the U.S. and across Europe are watching closely. Shares of First Republic Bank (FRC) and PacWest Bancorp (PACW) were temporarily suspended after plunging 65% and 52%, respectively, on Monday. Shares of Charles Schwab (SCHW) were down 7% at 11:30 a.m. ET Monday.
In Europe, the benchmark Stoxx Europe 600 Bank Index, which tracks 42 of the largest EU and UK banks, fell 5.6% in early trade, the biggest drop since last March. Shares in struggling Swiss banking giant Credit Suisse fell 9%.
SVB is not the only financial institution whose investments in government bonds and other assets have fallen sharply in value. According to the FDIC, U.S. banks will have $620 billion in unrealized losses by the end of 2022 — assets that have fallen in price but haven’t been sold yet.
Another key headline: HSBC stepped in on Monday to buy SVB UK for £1 ($1.20), securing deposits for thousands of British tech companies that hold funds at the bank. If no buyer is found, SVB UK will be bankrupted by the Bank of England and customers will only be able to secure deposits worth up to £85,000 ($100,000) or £170,000 ($200,000) in joint accounts.