The biggest bank failure since the 2008 global financial crisis has naturally sparked fear among investors, depositors, regulators, and the wider financial community: is the collapse of Silicon Valley Bank (SVB) an isolated incident or the start of something much worse?

Few spotted the collapse of SVB coming. But within 48-hours, the start-ups that had deposited billions with SVB were concerned they had lost their funds. It prompted the US regulator to intervene and a rescue deal in the UK that saw SVB’s local operations – a key lender for technology start-ups in Britain – being bought in a last-minute deal by HSBC for £1 (or $1.21)1.

It was the biggest US lender to fail since Washington Mutual collapsed in the aftermath of the Lehman Brothers bankruptcy in 2008. And fears of a wider systemic issue in the banking sector haven’t been helped by news that, in the past week, both Signature Bank – a New York-based real estate lender – and Silvergate – a California-based cryptocurrency services provider – have also failed.

Moreover, as both SVB and Signature Bank fell under regulatory control, another bank – San Francisco-based First Republic – saw shares plunge some 70% before trading was halted.

All of which has raised fears about what this might mean for other banks, prompting US President Joe Biden to calm the situation by announcing the US will do "whatever is needed" to shore up banks2.

Silicon Valley Bank was founded in 1982 by Wells Fargo bankers Roger Smith and Bill Biggerstaff, along with Stanford professor Bob Medearis. As the name suggests, the bank was one of the main lenders for the tech industry, including start-ups, venture capital (VC), and biotech companies – it provided financing for almost half of the VC-backed start-ups in the US.

Deposits in SVB grew from $60 billion in 2019 to over $189 billion in 20223, fuelled by record low interest rates, the crypto/tech boom, and the willingness for VCs to invest in multiple growth opportunities. Indeed, the bank had more than $200 billion in assets and $175 billion in deposits at the time of its collapse4.

SVB invested a significant portion of those deposits into long-dated bonds. When the US Federal Reserve (the Fed) – the central banking system of the US – started hiking interest rates in 2022 to contain inflation, the value of that book of bonds fell dramatically at the same time that new deposits were slowing to a trickle, because the change in direction of interest rates also affected the very customer base that SVB was focused on.

Then SVB announced an unexpected restructuring of its balance sheet, involving a $2.25 billion stock offering (common and preferred) and the sale of its $21 billion in Available-for-Sale securities, incurring a $1.8 billion loss5.

This sale, which was intended to reposition their asset book for a higher-for-longer interest rate environment and strengthen net interest margins and profitability instead spooked investors and sparked mass withdrawals of deposits that simply couldn’t be covered – customers tried to withdraw an eye-watering $42 billion from the bank in just one day6.
The potential banking crisis stemming from the collapse of SVB has largely been averted owing to the clear message sent from the US government – the Fed, the Federal Deposit Insurance Corporation (FDIC) and the US Treasury Department – which said that all depositors at SVB would be made whole and that they would have full access to their funds.

The Fed has created a new facility called the Bank Term Funding Program (BTFP) that will offer loans up to one year to banks. The program will be backed by money from the Treasury’s Exchange Stabilization Fund – $25 billion to be precise, which is an amount large enough to cover all uninsured deposits at US banks. And banks will effectively be able to borrow at the Fed against collateral such as Treasuries at par, rather than market value – greatly reducing any need for banks to liquidate bonds to meet unexpected withdrawals.

As such, the risk should be relatively ringfenced, but if investor fears escalate, there’s always the risk that the talk of contagion becomes a self-fulfilling prophecy. This is why the US government has come out so strongly in support of deposit holders – setting such a precedent helps to restore confidence in the banking system.

On top of that, the risk of contagion to other parts of the banking industry is also relatively low; not only are there more protections in place since the 2008 global financial crisis, but also many of the key factors in the run on SVB were idiosyncratic.
Although the short-term systemic risks look to have been avoided, the wider banking sector is not immune to the effects of rising interest rates, especially as the sector was sitting on $620 billion of unrealized losses at the end of 2022 in their investment portfolios, according to the FDIC, which weakens the sector’s overall ability to deal with unexpected future liquidity needs7.

Then there is the likely impact on the start-up and early-stage technology and biotechnology community. Many of them relied on SVB for their deposit and funding needs. Over the long term, this could lead to a slowdown in innovation as less funding is available.

More broadly, the stress created by the fall of SVB could influence the Fed and give it pause on the size and speed of the recent interest rate hikes.

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  • Bond – the ‘bond market’ broadly describes a marketplace where investors buy debt securities that are brought to the market, or ‘issued’, by either governmental entities or corporations. National governments typically ‘issue’ bonds to raise capital to pay down debts or fund infrastructural improvements. Companies ‘issue’ bonds to raise the capital needed to maintain operations, grow their product lines, or open new locations.
  • Duration – A measure of a bond’s sensitivity to changes in interest rates. Monitoring it can effectively allow investors to manage interest rate risk in their portfolios.
  • FDIC – The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by US Congress to maintain stability and public confidence in the nation’s financial system. The FDIC insures deposits, examines and supervises financial institutions for safety, soundness, and consumer protection, and makes large and complex financial institutions. It was created by the Banking Act of 1933, enacted during the Great Depression to restore trust in the American banking system.
  • Short/long-term securities – Fixed-Income securities provide investors with a stream of fixed periodic interest payments and the eventual return of principal upon its maturity. The US Treasury guarantees government fixed-income securities, making these very low risk, but also relatively low-return investments. Short-term fixed-income securities include Treasury bills, which mature within one year from issuance, while longer-term Treasury-issued securities include the Treasury bond (T-bond) which matures in 30 years.
  • Volatility – Volatility is the rate at which the price of a particular asset increases or decreases over a particular period. Higher stock price volatility often means higher risk.
  • Yield – A measure of the income return earned on an investment. In the case of a share, the yield is the annual dividend payment expressed as a percentage of the market price of the share. For bonds, the yield is the annual interest as a percentage of the current market price.