Silicon Valley Bank's Collapse Sends Shockwaves Through Global Markets

Author: Connor Campbell - Bullion & Economics Editor

Published: 14 Mar 2023

Last Updated: 15 Mar 2023


The largest failure of a US bank since 2008 has occurred, with Silicon Valley Bank (SVB) being shut down by regulators due to inadequate liquidity and insolvency. The collapse of SVB has significant consequences for the tech industry, as it was a crucial lender for early-stage businesses, and raises concerns about the broader risks facing banks due to rapid increases in interest rates.

SVB Shut Down by Regulators in the United States

The regulatory authorities have taken control of customer deposits as the firm was struggling to raise funds to cover the losses caused by the sale of assets affected by higher interest rates. The bank's collapse has led to a rush of customer withdrawals, causing widespread panic and investor flight, and raising concerns about the state of the banking sector. The impact of SVB's collapse is particularly significant for the tech industry as the bank was a crucial lender for early-stage businesses, with the majority of US venture-backed technology and healthcare firms that listed on stock markets last year being its banking partners.

Banks Increase in Interest Rates and Hit Bond Markets

The collapse of SVB has far-reaching effects, and it remains to be seen how businesses, particularly those in the tech industry, will manage the fallout. Even businesses without a direct association with the bank were affected, like customers of Rippling, a firm that handles payrolls software and had used SVB. It warned that current payments might face delays and said it was switching its business to another bank. SVB's UK subsidiary will be put into insolvency from Sunday evening, and the Bank of England said Silicon Valley Bank UK would stop accepting deposits or making payments in the interim.

The collapse of SVB has raised concerns about the broader risks facing banks as rapid increases in interest rates hit bond markets. Central banks worldwide, including the US Federal Reserve and the Bank of England, have sharply raised borrowing costs over the last year to curb inflation. However, as rates rise, the value of existing bond portfolios typically declines. These declines mean many banks are sitting on significant potential losses, although the change in value would not typically be a problem unless other pressures force the firms to sell the holdings.

Regulatory Responses and Impact on Financial Markets

According to banking regulators in California, where the firm has its headquarters, Silicon Valley Bank faced "inadequate liquidity and insolvency. The bank was endeavoring to raise $2.25 billion to cover a loss brought about by the sale of assets, specifically US government bonds, that had been impacted by an increase in interest rates. Its troubles prompted a rush of customer withdrawals, causing widespread panic and investor flight. Global selling of bank shares was triggered by concerns that other banks might face comparable difficulties.

The Federal Deposit Insurance Corporation (FDIC) took charge of the roughly $175bn in deposits held at the bank to "protect insured depositors." The bank offices will reopen, and clients with insured deposits will have access to funds "no later than Monday morning." Money raised from selling the bank's assets will go to uninsured depositors. Janet Yellen, the US Treasury Secretary, conveyed her complete trust in the banking regulators to take the necessary measures in response.

On the day of the collapse, tech-heavy expert Nasdaq saw its biggest one-day drop since the start of the COVID-19 pandemic, ending the day down 1.7%. Smaller companies were also affected by the sell-off, leading to the suspension of trading for firms such as Signature Bank. The S&P 500 fell by 1.4%, and the Dow closed 1% lower as well. Major European and Asian indices also ended the day in the red, with a decline of 1.6% seen in the FTSE 100.

Impact of Rising Interest Rates on Financial System

The collapse of SVB has also raised questions about the impact of rising interest rates on the financial system. Central banks around the world continue to raise borrowing costs, and as a result, banks are increasingly exposed to losses on their bond portfolios. This could lead to a vicious cycle where banks are forced to sell their holdings to cover losses, leading to further declines in bond prices and more losses. If this cycle were to continue, it could lead to a broader financial crisis.

In response to the collapse of SVB, regulators have indicated that they will take steps to prevent similar failures in the future. The Federal Reserve has stated that it will closely monitor banks' liquidity levels and act if necessary. The FDIC has also said that it will increase the frequency of its examinations of banks that specialize in niche markets. While these measures should help prevent similar failures in the future, they may not be enough to address the underlying risks associated with rising interest rates and specialized banks.

The collapse of SVB has served as a wake-up call for the banking sector. As interest rates continue to rise and banks become more specialized, the risks of bank failures are increasing. Regulators will need to take a more proactive approach to managing these risks, and banks will need to be more diligent in managing their liquidity and exposure to niche markets. The tech industry, in particular, will need to find alternative sources of funding, as the collapse of SVB has highlighted the risks associated with relying too heavily on a single lender.

The Influence of Macroeconomic Elements on the Value of Gold

The collapse of Silicon Valley Bank is a significant setback for the tech industry and the broader banking sector. The incident has prompted worries regarding the potential hazards linked to specialized banks and the consequences of increasing interest rates on the financial system. Regulators and banks will need to take a more proactive approach to managing these risks if they want to prevent similar failures in the future. The collapse of SVB has also highlighted the need for startups and early-stage businesses to diversify their funding sources, rather than relying too heavily on a single lender. As the banking sector and the broader economy continue to navigate the challenges posed by rising interest rates and other macroeconomic forces, it will be critical for all stakeholders to remain vigilant and take action to mitigate the risks of future failures.

What Is the Impact on Global Markets?

Following the collapse of Silicon Valley Bank, banking stocks worldwide plummeted, with over £383bn wiped off their value. The Nikkei 225 dropped by 2.2pc, and the Topix index fell by 2.7pc, causing concerns over Japanese firms' exposure to US bonds. MUFG, Mizuho Financial Group, and Sumitomo Mitsui Financial Group were hit hard, with their shares plummeting. Japanese banks had increased their investment in foreign debt over the past decade, as domestic yields were impacted by Haruhiko Kuroda's aggressive monetary easing.

The Topix Banks index in Japan is experiencing its worst day since March 2020, declining by 7.4%. Mitsubishi UFJ Financial Group and Mizuho Financial Group both took a hit with losses of 8.66% and 7.1%, respectively, while the Topix index was down by 2.7%. Hong Kong's Hang Seng index has fallen by 2.35%, South Korea's KOSPI index by 2.4%, and Australia's S&P/ASX by 1.4%.

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