Silicon Valley Bank Collapse Sparks Concerns of Banking Meltdown: What You Need to Know

Silicon Valley Bank (SVB), America’s 16th largest commercial bank, collapsed on Friday, sending ripples of fear across global financial markets. While the federal government stepped in to guarantee customer deposits, investors are concerned that the collapse could trigger a broader banking meltdown. Questions are now being raised about the bank’s operations, how it collapsed, the bank run it experienced, and the impact of the collapse on investors and other banks.

What is Silicon Valley Bank?

Silicon Valley Bank was established in 1983 and provided banking services to almost half of all US venture-backed technology and life science companies. Its assets, which include loans, more than tripled from $71 billion at the end of 2019 to $220 billion at the end of March 2022, and it had operations in several countries.

Why did it collapse?

SVB invested billions into US government bonds during the era of near-zero interest rates. However, when the Federal Reserve hiked interest rates aggressively to tame inflation, the bond portfolio’s value decreased, which, coupled with the rising borrowing costs, led to difficulties for tech startups, some of SVB’s clients, to raise new venture capital funding. The bank’s collapse was also triggered by a bunch of securities sold at a loss and the announcement of $2.25 billion in new shares to plug the hole in its finances.

What sparked the bank run?

The announcement of securities sold at a loss and the $2.25 billion in new shares triggered a run on the bank, as customers panicked and withdrew their deposits in large numbers. The bank’s stock plummeted 60% Thursday and dragged other bank shares down with it.

What about depositors and investors?

US regulators guaranteed all SVB customers’ deposits to prevent more bank runs and help tech companies continue paying staff and funding their operations. However, the intervention does not amount to a 2008-style bailout, and investors in the company’s stock and bonds will not be protected.

Will this trigger a banking crisis?

While there are already some signs of stress at other banks, most analysts point out that US and European banks have much stronger financial buffers now than during the global financial crisis. They also highlight that SVB had very heavy exposure to the tech sector, which has been particularly hard hit by rising interest rates.

While SVB’s collapse is a major failure, other niche players like Signature are quite unique in the broader banking world, according to research analysts at M&G Investments. The Fed has also said it would make additional funding available for eligible financial institutions to prevent another SVB from collapsing.

In conclusion, Silicon Valley Bank’s collapse has sent shockwaves across global financial markets, with questions being raised about the bank’s operations, how it collapsed, and the impact on investors and other banks. However, US regulators have stepped in to guarantee customer deposits, and most analysts believe that the banking industry has stronger financial buffers now than during the global financial crisis.