Silicon Valley Bank collapse: What you need to know
The first major financial casualty of rampant rate hikes by the US Federal Reserve’s actions is none other than a mammoth financial institution Silicon Valley Bank (SIVB.O).
At the start of March 2023, Silicon Valley Bank was a well-capitalized institution. On March 8 it announced it was seeking to raise funds.
Within 48 hours, its panic-stricken venture capital clients crippled the institution with mass withdrawals amounting to a staggering $42 billion, ending SVB’s 40-year legacy.
This article examines the cause of the SVB crisis, its ongoing fallout, and what it means for traders and investors this year.
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By March 10, US regulators shuttered SVB and seized its deposits in what has become the biggest US banking failure since the 2008 financial crisis. SVB reported $212 billion in assets for the fourth quarter of 2022. Overall, its demise is the second-largest banking crisis behind Washington Mutual, which in 2008 had approximately $300 billion in assets.
SVB downward spiral – How did it happen?
SVB’s downward spiral began late on March 8, when it surprised clients and investors with news that it needed to raise $2.25 billion to shore up its balance sheet. SVB’s primary clientele of technology investors began a cascade of withdrawals.
Less than a week after the crisis many clients are lamenting the role that other investor played in SVB’s demise.
The incident that is still having a drastic effect on the global economy is the latest fallout from the Fed’s actions to stem rampant inflation. Since the start of 2022, the Fed, along with many international counterparts, has implemented aggressive rate hikes.
SVB – 40-year run comes to an abrupt end
In total, clients withdrew a mind-boggling $42 billion worth of deposits by the end of March 9, according to California regulators.
By the close of business on March 9, SVB had a negative cash balance of $958-million, reports regulators.
Why did the bank fail so abruptly? Many believe the highly-interconnected nature of its tech investing community is a key reason for the bank’s sudden collapse.
Major funds including, Union Square Ventures and Coatue Management, immediately notified their clients, instructing them to withdraw funds out of SVB. Social media only served to exacerbate the panic. Want to learn more about the markets? Check out our latest podcast!
It’s an incredible disaster showing just how prone the financial sector can be to panic and the power fund managers have over clients.
US President addresses the situation
Shockwaves from the collapse of Silicon Valley Bank smashed global bank stocks on March 14. US President Joe Biden and other policymakers failed to calm the market worried about panic spreading to other banks. Many called for the Fed to end interest rate hikes.
The Biden administrations called for stiffer regulation in the financial sector.
Banking regulators said on March 12 that SVB depositors would have access to their funds by March 13, putting to rest fears that companies invested in the bank would struggle to pay their employees.
Aftermath – SVB collapse unleashes Treasury volatility
Extreme volatility is rattling US Treasury markets in the wake of SVB’s collapse as investors fear a prolonged bout of panic withdrawals.
The yield on the two-year note saw its biggest one-day drop since October 1987 on March 13, while the benchmark 10-year yield fell to its lowest level since Feb 3.
Investors had been extremely bearish on Treasuries following Federal Reserve Chair Jerome Powell’s announcement that the central bank might have to raise rates higher than expected.
The rapid collapse of Silicon Valley Bank, as well as the knock-on demise of New York’s Signature Bank, forced traders to reverse their bets on slowing rate hikes.
Investors are eagerly awaiting the latest US Consumer Price Index (CPI) data on March 14. Depending on the data, higher inflation in 2023 could see a new barrage of rate hikes from the Fed.
The S&P has pared its year-to-date gains and is now up 2.89% in 2023, compared to a drop of -19.4% experienced in 2022.
Banking sector fallout
A furious race to reprice interest rate expectations is sending waves through markets as previously, investors bet the Fed would be reluctant to raise rates later in March. The dramatic re-pricing of US rate expectations has knocked the US dollar lower – at the time of writing it was hovering around $1.0710 to the Euro.
Nervous traders have capped oil prices, with Brent crude futures slipping below $80 a barrel.
Traders currently see a 50% chance of no rate hike later in March, with rate cuts priced in for the second half of 2023. Earlier in March, a 25 basis-point hike was priced in, with a 70% chance of 50 basis points.
Analysts say uncertainty continues to drag the sector with investors still worried about the health of smaller global banks.
Major US banks lost around $90 billion in stock market value on March 13, bringing their loss over the past three trading sessions to nearly $190 billion.
Regional US banks were hit the hardest; shares of First Republic Bank (FRC.N) crashed more than 60%. Europe’s STOXX banking index (.SX7P) closed 5.7% lower. Germany’s Commerzbank (CBKG.DE) fell 12.7% and Credit Suisse (CSGN.S) dropped 9.6% to a record low.
In money markets, indicators of credit risk in the US and Euro Zone banking systems are on the rise.
In response, the price of gold, a popular haven, rocketed above the key $1900 level.
SVB in review
Regulators have stepped in to aid depositors of the failed SVB and announced a Federal Reserve facility that would allow firms to borrow more freely against safe assets.
The Fed announced a review of the supervision and regulation of SVB on March 13. It will disclose its findings by May 1.
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