Last week, California-headquartered bank SVB (Silicon Valley Bank) announced a US$1.8bn loss due to asset sales in order to meet withdrawal requests. Trading of SVB stock was halted on the morning of Friday 10th March when stocks plummeted by 68%.
By Monday, its US business had completely collapsed, in the largest banking failure since the financial crisis of 2008. Other SVB branches around the world quickly followed, with its UK business being bought for £1 by HSBC in a Government-backed rescue deal.
German regulator BaFIN has ordered a moratorium on all activity through its German branch. It is currently unable to sell assets or process payments due to the risk of not being able to fulfil commitments to its creditors. The bank has also been required to close its client business.
Regulators are scrambling to try and reduce the impact of the crisis on the wider banking industry, but BaFIN said it was not worried about the impact of the bank’s closure on German markets. “The distressed situation of Silicon Valley Bank Germany Branch does not pose a threat to financial stability,” it said, because it “has no systemic relevance.”
Canada’s Office of the Superintendent of Financial Institutions similarly shuttered SVB’s Canadian operations on Saturday.
Why did SVB collapse?
SVB had been operating for 40 years and was the 16th largest bank in the US, specialising in servicing technology companies. During the Covid-19 pandemic, SVB capitalised on the growth of technology startups as the demand for tech increased due to remote working.
SVB invested heavily in the US government bonds market, which has been negatively impacted by the recent hike in interest rates implemented by the Federal Reserve to try to combat rising inflation.
This significantly impacted the value of SVB’s portfolio, which might not have been such a problem in the long-term if they were able to keep hold of their investments, however, economic conditions have caused many of SVB’s clients to withdraw funds. This forced SVB to sell many of its bonds at a loss, which in turn caused investors to get anxious and eventually resulted in a run on the bank. “In a series of risk management oversights, macroeconomic factors and the good old fashioned rumour mill, Silicon Valley Bank (SVB) went through a liquidity crisis, causing a bank run on their deposits,” said Forbes.
What will happen to SVB depositors and investors?
In the UK, the HSBC buyout means customers and businesses will now be able to access their funds as normal. But the fate of other branches is still to be determined in this fast-moving story.
In the US, federal regulators stepped in on Sunday and announced they would back all deposits, even beyond the insurance cap of US$250,000. “Depositors will have access to all of their money starting Monday, March 13,” the US Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) said in a joint statement on Sunday evening. “No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”
US president, Joe Biden said in a statement: “I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again.” Regulators have confirmed that senior management at the bank will be removed.
What does this mean for banking regulation?
Annie Searle, an associate teaching professor at the University of Washington’s Information School and a former senior executive at Washington Mutual Bank says the story is all too familiar.
“For those of us who were executives or senior managers at Washington Mutual in 2008, this felt like déjà vu – we had been part of the largest US bank failure in history,” she writes in her latest blog. “Some of us had worked subsequently on banking and finance regulation that was designed to ensure that such bank failures would not take place again. The Dodd Frank legislation included a ‘too big to fail’ clause, that required banks of a certain size to hold reserves against moments of crisis. Ironically, that requirement on capital reserves had been modified by the Trump administration after lobbying from (among others) the CEO of Silicon Valley Bank, Greg Becker.”
Under the Obama administration, banks with assets of more than US$50bn were subject to annual stress testing and stricter capital and regulatory requirements. After Trump’s unravelling of the Dodd-Frank Act, the threshold was increased so that only banks with assets of US$250bn or more were subject to these measures. SVB would therefore have been under much greater regulatory scrutiny had the Trump administration’s changes not been implemented.
Economists have said that central banks might have no choice but to stop raising interest rates in light of the SVB crisis. Bank lobbyists are suggesting the Federal Reserve is more likely to take action on a potential tightening of financial regulation, too.
“Clearly, Silicon Valley Bank’s failure will embolden people who see the current regulatory system as insufficient,” Brookings Institution senior fellow Aaron Klein, a former Treasury Department official and Capitol Hill economist, told Politico.
Worries about the impact of the event on the broader banking industry remain, despite the actions of governments to protect deposits. “The episode will contribute to higher levels of background volatility, with investors watching warily for other cracks to emerge as the Fed’s policy tightening continues,” one analyst told Reuters.
Other banks currently looking vulnerable to contagion include First Republic Bank, whose stock plunged by more than 60% in premarket trading Monday morning. New York-based Signature Bank was also closed by regulators on Sunday. The FDIC has created a “bridge” bank to enable Signature Bank customers to access their funds.
Credit Suisse has been highlighted by Wall Street expert, Robert Kiyosaki – famed for predicting the fall of Lehman Brothers in 2008 – as the next potential bank to become insolvent.
“The problem is the bond market, and my prediction – I called Lehman Brothers years ago – and I think the next bank to go is Credit Suisse because the bond market is crashing,” said Kiyosaki.
Executives at SVB have now also been targeted by a class-action lawsuit accusing CEO Greg Becker and CFO Daniel Beck of misleading stockholders about SVB’s risk appetite.
SEC on high alert for misconduct
In a statement, the SEC has said it is on high alert for any potential market misconduct in the fallout of this crisis.
“In times of increased volatility and uncertainty, we at the SEC are particularly focused on monitoring for market stability and identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or the markets more broadly,” said SEC Chair, Gary Gensler. “Without speaking to any individual entity or person, we will investigate and bring enforcement actions if we find violations of the federal securities laws.”
Digital banking: a bank run in real-time
The speed at which SVB’s collapse took place was accelerated by the rise of digital banking and the ability of depositors to withdraw their funds at the tap of a smartphone screen.
“Panicked SVB clients tried to withdraw US$42bn from the bank Thursday — equivalent to nearly US$500,000 a second over a 24-hour period — and the bank simply couldn’t meet the demand,” writes Hassan Chowdhury for Business Insider. “For context, the biggest bank run of the 2007-2008 financial crash saw US$16.7bn withdrawn from Washington Mutual, a savings and loan bank, over the course of 10 days.”