The collapse of Silicon Valley Bank (SVB), the 16th-largest commercial bank in America, on March 10, 2023, resulted in a run on the institution and significantly impacted international financial markets. From $71 billion at the end of 2019 to a peak of $220 billion at the end of March 2022, SVB’s assets tripled due to the expansion of the tech sector. However, a 48-hour run on the bank resulted in customers withdrawing their deposits, precipitating the bank’s sudden meltdown.
The bank’s decision to invest in US government bonds during the period of low interest rates was the primary cause of the bank’s collapse. The value of SVB’s bond portfolio was negatively impacted by the Federal Reserve’s aggressive rate hikes to control inflation. Last week, the portfolio returned an average of 1.79%, significantly less than the 3.9% yield on 10-year Treasury bonds. The cost of borrowing increased simultaneously, forcing tech startups to allocate more money to debt repayment while also using SVB deposits to fund operations and expansion.
When the lender revealed it had sold several securities at a loss and would issue $2.25 billion in new shares to close the hole in its books, it started a run on the bank. Customers began to panic as a result and began to withdraw money in large quantities. The bank’s stock fell 60% on Thursday as investors started to worry about a repeat of the global financial crisis, dragging down other bank shares with it.
To stop further bank collapses and support tech companies in their efforts to maintain employee pay and operational funding, US regulators declared that they would guarantee all SVB customers’ deposits. Since the intervention fell short of the bailout in 2008, holders of the company’s stock and bonds won’t be shielded. Investors are now considering whether the collapse of SVB could cause stress at other banks by causing a wider banking crisis. After the shares of First Republic Bank and PacWest Bancorp fell 65% and 52%, respectively, and the benchmark Stoxx Europe 600 Banks index dropped 5.6% in morning trade, trading in those two companies was temporarily suspended. At 11.30 a.m. ET on Monday, shares of Charles Schwab (SCHW) were down 7%. The Swiss banking behemoth Credit Suisse saw a 9% decline in share price.
Although experts believe that the unique nature of SVB’s heavy exposure to the tech sector is unlikely to create significant credit problems for large, diversified banks in the US and Europe, bank customers in the USA share grave concerns about the possible outcomes in the near future.