Silicon Valley Bank’s Fallout Explained

Silicon Valley’s recent fallout which was deemed the US’ second-biggest banking collapse since 2008, has been making the headlines all over the world in the past few days. While this bank is US-based, it has direct effects on the markets as a whole. So what exactly is the Silicon Valley Bank (SVB), what caused its collapse, and how is it affecting the markets? Here’s what you need to know:

What Is Silicon Valley Bank?

A big player in the tech field, Silicon Valley Bank (SVB) is an American commercial bank that was founded in 1983, based in Santa Clara, California, and had 55 offices and over 17 branches around the world. It is also important to note that the SVB was highly esteemed and reputable as it was considered the sixteenth largest bank in the United States before it collapsed on Friday, March 10th, 2023. SVB was owned by SVB Financial Group and was also a member of the Federal Reserve System, which is the central banking system of the United States, and was regulated by the California Department of Financial Protection and Innovation (DFPI).

Furthermore, while the SVB catered to a plethora of businesses from various industries, its main attraction was start-ups from the technology, healthcare, and private equity sectors among others. This is because the commercial bank used to provide loans to startup businesses with the understanding that these companies tend to generate revenues much slower than established businesses. Accordingly, by collecting deposits from venture capital-financed businesses, t the bank achieved the goal of providing loans to startups.  

What Caused the Silicon Valley Bank to Collapse in Just Two Days?

On Wednesday, March 8th, 2023, things started to go south for this major bank as it was announced that it was attempting to raise $2.25 billion in order to improve its balance sheet. This news, in turn, sparked jitters and anxiety among its investors and market watchers. Some even called the collapse the second worst banking collapse in US history since the 2008 financial crisis. 

It appears that some of the problems that could’ve led to SVB’s fall from grace are the interest rate hikes brought about by the Federal Reserve and other central banks in their attempts to tame record-high inflation and heal the ailing economy. This is because these rate hikes can lead to liquidity issues, due to the fact that the SVB invested largely and in the long term in US bonds which eventually lost some of their value due to higher interest rates. This, in turn, led to the SVB’s bond portfolio depreciating significantly.

In addition, the economy started to take a toll on the bank and tech companies too. This, as a result, caused many tech companies investing in that bank to withdraw their funds in order to save themselves from falling at a time when private fundraising and IPOs were difficult to obtain. In addition, since the SVB was not liquid enough, meaning that it did not hold enough cash on hand, it had to sell all of its ready-for-sale bonds below market value and lose $1.8 billion, hence leading to its bankruptcy. 

The situation escalated further on Friday the 10th as regulators announced the bank’s shutdown in a press conference from the California Department of Financial Protection and Innovation. In addition, it was also announced that the Federal Deposit Insurance Corporation (FDIC), an American government agency that insures deposits in American banks, will hold the SVB’s insured deposits. (Source:CNBC)

Subsequently, on Friday, following this announcement, the FDIC declared that the SVB’s branch offices will reopen on Monday for the bank’s insured depositors to withdraw their money. For each account ownership category, the FDIC covers up to $250,000 per depositor, per bank and it also revealed that those without insurance will receive receivership certificates and an advanced dividend this week. 

Markets React: Silicon Valley Bank's Role in Tech

As the name might entail, Silicon Valley bank was certainly at the epicenter of the US tech industry, this bank played a major role in the tech sector due to the fact that it used to cater to over half of US tech and healthcare companies. Nonetheless, while its significance was ostensible in the US, it also served businesses abroad and, as such, had a significant impact on the tech field as a whole. Some even called this bank a “technology specialist,” which further highlighted its prominence in the nascent tech industry. (Source:The New York Post)

Therefore, given SVB’s distinct importance, it is no surprise that the tech industry, which has already been struggling to keep pace with rising inflation, interest rates, and layoffs, responded harshly to this news. Accordingly, the tech-heavy Nasdaq (US-TECH 100) index fell by 1.76% on Friday, and the Dow Jones Industrial Average (USA 30) and the S&P 500 (USA 500) shed 1.07% and 1.45% respectively that day as investors digested the bank’s surprising collapse. 

Moreover, while it is not exactly clear whether the fall is due to Silicone Valley’s bankruptcy, losses across a myriad of big tech stocks were observed on Friday as NVIDIA (NVDA), Meta (META), and Microsoft (MSFT) fell by 2%, 1.2%, and 1.5% respectively. 

Nonetheless, despite Friday’s woes, it seems that on Monday morning the abovementioned major indices rose slightly following the regulator’s announcement that it will backstop all SVB depositors and provide additional funding to other banks. In response, index Futures rose as the S&P 500 Futures, and the Nasdaq 100 Futures rose by 1.8% and 1.9% respectively on Monday morning. 

Other Banks Responded

SVB’s fallout not only affected the tech field but also rippled through the banking sector too as major cryptocurrency banks, Silvergate Capital and Signature Bank, also felt the shock. On Wednesday, Silvergate Capital, a big crypto bank, announced that it would shut down operations and voluntarily liquidate. On Sunday evening, Silvergate Capital, which was also a huge crypto bank, was shut down by regulators. 

These banks’ fallouts, coupled with SVB’s bankruptcy could have significant implications for startups as Silvergate and Signature Bank are big players in the crypto space, and SVB holds over half of venture-backed US startup companies’ funds, including crypto funds and assets. This may have caused volatility in the crypto sector as Bitcoin fell below $20,000 on Friday. As of the time of the writing, however, since Friday, Bitcoin was able to recoup these losses as it rose by about 9% and reached the $22,000 price mark.

All in all, SVB’s recent news shocked many market sectors and had irrefutable effects on stocks. However, it seems that the news regarding regulatory intervention to protect investors’ funds coupled with Sunday’s US President Joe Biden’s support of the Treasury Department’s treatment of the situation, may have driven the stock market higher from Friday’s lows. 

Traders, investors, and analysts alike may want to keep an eye out on how the latest SVB escalations can affect the upcoming Federal Reserve rate hikes which are due March 21-22. If indeed the central bank will raise interest rates as expected, then it can further stunt the growth of the companies affected by SVB’s collapse and vice-versa.