The collapse of Silicon Valley Bank (SVB) on 10th March 2023 has prompted questions from Infinity clients fearing a repeat of the global financial crisis. We take a look at what happened and how investors can protect their assets.
Largest US bank collapse since 2008
Until last week, SVB was the 16th largest bank in the US by assets, managing an estimated $209 billion at the end of 2022. Founded in 1983 in Silicon Valley, it specialised in banking services for tech startups.
On 10th March the US Federal Deposit Insurance Corporation (FDIC) intervened to take control of the bank amidst fears of a systemic risk to the US and global financial system. FDIC’s role is to maintain financial stability and public confidence in the US financial system. Given that this is the largest failure of a US bank since 2008, the move sparked fears of another global financial crisis.
Why did SVB collapse?
The simple explanation of the collapse is a classic run. A large number of spooked investors sought to withdraw deposits simultaneously amid concerns over the solvency of the bank.
The reasons behind these concerns are more complicated.
Tech companies boomed during the pandemic and many of them held healthy deposits in SVB as a result. These funds were invested heavily in long-dated US government bonds. In normal times, these are considered safe investments with investors receiving their capital back when the bonds mature.
Unfortunately, bonds have an inverse relationship with interest rates. So as interest rates have risen over the last year, bond prices fell.
At the same time, demand for cash increased as tech companies began to draw on their deposits amid worsening economic conditions over the last year. Unable to meet demand, SVB was forced to sell some of its bonds, incurring losses because they had not been held to term.
In response, on 8th March SVB announced a capital raising to the tune of £2.25billion. This was the red flag that the bank was short of money and triggered the bank run.
Just 48 hours later, the regulator intervened and shut the bank down. Inadequate risk management practices caused the precipitous fall of the bank.
The Fed to the rescue
On 12th March, the Federal Reserve (the Fed) stepped in, announcing a new Bank Term Funding Program (BTFP) to reduce the risk of further bank runs. This guarantees all deposits, even those exceeding the $250,000 per person per insured bank limit imposed by the FDIC, reassuring depositors that they will be able to access their funds.
The BTFP also offers loans of up to a year to banks and other institutions whose bonds have fallen in value, eliminating the need for banks to offload securities quickly in times of stress.
This move was the biggest intervention by the Fed in the financial market since the 2008 economic collapse. It is not funded by taxpayers but by the Deposit Insurance Fund.
Over the pond, HSBC came to the rescue, buying the UK arm of SVB for a symbolic £1.
What does the SVB collapse mean for the markets?
Sudden rises in interest rates have exposed weaknesses in the global financial system and raised fears that other crises could be round the corner. Markets are rattled and investors are jumpy with fears of recession looming.
Global markets have tumbled, dragged down by falling share prices the banking sector and worries over the wider fallout of the SVB collapse. Concerns have been expressed over the fragility of smaller US banks. Six have been put on downgrade watch by Moodys.
On a more positive note, Evelyn Partners, Infinity’s investment partner, has issued this reassuring statement:
‘At this stage, we do not believe this is likely to be a repeat of the Global Financial Crisis (GFC). SVB collapsed as a result of a liquidity crisis with too many ‘large’ depositors wanting to take money out at the same time. The GFC was a solvency crisis caused by bad loans and poor investments….
… The quick response from the Fed, FDIC and the Treasury Secretary should, in our view, be enough to reduce stress across the financial system, support financial stability and minimise the impact on businesses and the wider economy. The acquisition of SVB UK by HSBC should also help to draw a line under this crisis in the UK.’
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