The Global Impact of Silicon Valley Bank’s Collapse on Investors
The collapse of Silicon Valley Bank (SVB) in March 2023 has become one of the most significant stories in global finance this year. Along with SVB, Signature Bank and Silvergate Bank also fell victim to mounting financial pressures, leaving ripples across the global banking sector. Notably, shares in Credit Suisse plummeted nearly 30%, and the Swiss bank was eventually taken over by UBS. Let’s take a deeper look at what led to the collapse of SVB, its aftermath, and how these events are affecting investors worldwide.
What Happened to Silicon Valley Bank?
SVB had built a strong reputation over the years, particularly within the tech and venture capital sectors. It became the go-to bank for startups, amassing $212 billion in assets and over $175 billion in deposits by the end of 2022. SVB expanded into the UK in 2012, where it served over 3,000 clients.
However, the bank’s downfall came on March 10, 2023, when it was seized by U.S. regulators after experiencing $42 billion in withdrawal requests from clients. This sudden liquidity crisis resulted in SVB’s collapse—the largest failure of a U.S. bank since the 2008 failure of Washington Mutual.
The Causes Behind SVB’s Collapse
SVB’s financial troubles were largely due to its significant investments in long-term U.S. government bonds and mortgage-backed securities. These fixed-income investments lost value as the Federal Reserve raised interest rates from historically low levels. As rates increased, the value of bonds fell, leading to significant losses for the bank.
Additionally, many of SVB’s depositors were startups that faced rising costs and reduced access to funding. This combination of factors squeezed the bank’s liquidity, prompting many clients to withdraw their funds, which ultimately led to its collapse.
The Extent of the Losses
In an attempt to rectify its financial position, SVB sold a $21 billion bond portfolio with a below-market yield of 1.79%. The sale resulted in a realized loss of $1.8 billion after taxes, further eroding confidence in the bank. Within 48 hours of disclosing these losses, SVB was taken over by the U.S. government.
What’s Next for SVB?
Following the collapse, the Federal Deposit Insurance Corporation (FDIC) took control of SVB. While a new buyer for the bank has not been found yet, U.S. regulators assured depositors that their funds would remain safe. There are discussions about possibly breaking up the bank and selling its assets to new owners. Additionally, Signature Bank, which had significant exposure to the crypto market, also faced regulatory intervention and was acquired by New York Community Bancorp.
Impact on the UK: SVB’s UK Branch
In the UK, the Bank of England quickly intervened and facilitated the sale of SVB UK to HSBC for just £1. Importantly, this transaction did not involve taxpayer money, and customer deposits were fully protected. The UK government has also pledged to support tech firms exposed to SVB with short-term liquidity to help them meet their operational needs.
Global Impact: Focus on Latin America
SVB’s collapse has also affected startups beyond the UK and the U.S. Over 400 Latin American startups, in need of new banking partners, have turned to Trace Finance, a Brazilian fintech company, to manage their international banking needs. Trace is already processing around $1.5 billion in new customer accounts, highlighting the shifting landscape for international finance.
SVB’s Remaining Clients: Staying Loyal
Despite the bank’s collapse, some early-stage founders remain loyal to SVB’s services. The bank’s customer support, specifically designed for the startup ecosystem, is a feature that many entrepreneurs say is hard to find elsewhere. After SVB’s operations were resumed under new federal control, many customers were encouraged to return, with some still trusting the bank as their financial partner.
Market Reactions to the Banking Crisis
The collapse of SVB and the subsequent pressure on other banks led to a significant dip in global stock markets. In the U.S., bank stocks took a hit, and European markets such as those in Frankfurt, Paris, and Milan saw sharp declines. The FTSE 100 dropped by 2.3%, even after HSBC agreed to purchase SVB UK’s operations.
The UBS-Credit Suisse Acquisition
Credit Suisse was particularly affected by the turmoil in global banking, with shares plummeting 30% at one point. The bank’s largest shareholder, the Saudi National Bank, refused to provide additional funding, exacerbating fears. In response, Credit Suisse sought support from the Swiss National Bank (SNB), but it wasn’t enough to restore confidence.
To stabilize the situation, UBS stepped in and agreed to buy Credit Suisse for 3 billion Swiss francs (around $3.25 billion). The Swiss government and central bank provided liquidity to support the deal, and UBS assumed responsibility for the combined entity’s $5 trillion in assets.
What Does This Mean for Investors?
The collapse of SVB, along with the turmoil at Credit Suisse and other banks, has left investors reflecting on the risks in the banking sector. Many are emphasizing the need for a diversified investment portfolio to protect against potential losses from banking instability.
Additionally, the events have highlighted the growing trend of non-bank lenders gaining traction. Startups that traditionally relied on banks for funding are now considering alternative financing routes, with some already turning to private lenders as a more flexible option.
Conclusion
The collapse of Silicon Valley Bank and the ensuing pressure on global banks has sent shockwaves through the financial sector. For investors, this has highlighted the importance of diversification and exploring alternative lending options. While the full impact of these events is still unfolding, it is clear that the banking sector will face increased scrutiny, and private lenders may become an increasingly popular choice for startups and high-growth businesses.
