BigONE Insights: What Exactly Led To SVB Collapse?
As the preferred bank for the tech sector, SVB’s services were in high demand throughout the pandemic years. The initial market shock of Covid-19 in early 2020 quickly gave way to a golden period for startups and established tech companies, as consumers spent large amounts of money on gadgets and digital services. Many tech firms used SVB to hold cash for payroll and other business expenses, resulting in an influx of deposits. As banks do, the bank invested a large portion of the deposits.
The seeds of its demise were sown when it made large investments in long-term US government bonds, including mortgage-backed securities. For all intents and purposes, these were as safe as houses. Bond prices, on the other hand, have an inverse relationship with interest rates; as rates rise, bond prices fall. As a result, when the Federal Reserve began to raise interest rates rapidly to combat inflation, SVB’s bond portfolio began to lose significant value.
SVB would receive its capital back if it could hold those bonds for a number of years until they mature. However, as economic conditions deteriorated over the last year, particularly for technology companies, many of the bank’s customers began withdrawing funds from their deposits. Because SVB did not have enough cash on hand, it began selling some of its bonds at steep losses, frightening investors and customers. It only took 48 hours from the time it disclosed that it had sold the assets to its demise. BigONE will discuss what triggered the bank run and what it means for the banking sector in this article.
What Triggered SVB’s Bank Run ?
What caused the bank run? While SVB’s problems can be traced back to previous investment decisions, the bank’s run began on Wednesday, when the lender announced that it had sold a slew of securities at a loss and would sell $2.25 billion in new shares to plug a hole in its finances. “Suddenly, everyone became concerned about the bank’s lack of capital,” says Fariborz Moshirian, UNSW professor and director of the Institute of Global Finance.
Customers became aware of SVB’s dire financial situation and began withdrawing large sums of money. SVB’s clients had much larger accounts than those of a retail bank that serves both businesses and individuals. As a result, the bank run was swift. The $200 billion company went bankrupt just two days after announcing plans to raise capital, becoming the largest bank failure in the United States since the global financial crisis. On Thursday, the bank’s stock fell 60%, dragging down other bank shares as investors began to worry about a repeat of the global financial crisis a decade and a half ago.
By Friday morning, trading in SVB shares had ceased, and the company had abandoned efforts to raise capital or find a buyer. California regulators intervened, closing the bank and placing it in receivership under the FDIC, which typically entails liquidating the bank’s assets to repay depositors and creditors.
What does this mean for the banking sector?
Immediate fears of widespread contagion were alleviated by the US government’s prompt response in guaranteeing all deposits of bank customers. In response to the guarantees, financial futures, which allow investors to speculate on future price movements, rose for the US technology sector. There were fears that if that guarantee was not implemented, SVB account holders would be unable to pay employees, causing ripple effects throughout the economy.
Governments and regulators worldwide, including the United Kingdom and Australia, are looking for SVB exposure in their corporate and banking sectors. Longer term, the question is whether SVB’s vulnerability to rising interest rates is shared by other banks due to an over-exposure to falling bond prices.