In the largest collapse of an American bank, the US banking sector suffered a strong financial shock after US regulators closed Silicon Valley Bank (SVB), rekindling memories of the global financial repercussions of 2008, triggered by the bankruptcy of Lehman Brothers. The closure of SVB followed its collapse and failure to compensate for its financial losses and its inability to accommodate its customers’ sudden withdrawal of funds. This led to an official announcement of its bankruptcy on the morning of Friday, March 10, 2023. The bank came under the control of the US Federal Deposit Insurance Corporation (FDIC), which later announced that SVB had been taken over by the Department of Financial Protection and Innovation in California.
The failure of SVB, which focused on financing technology start-up companies, has raised fears in financial circles and global markets of widening repercussions for the overall US economy that may spread to the global banking sector. Will the collapse of SVB repeat the global financial crisis scenario?
Features of the Crisis
Founded in 1983, SVB specialized in providing banking services to technology companies in the US. As the main lender to start-up companies, the bank also served more than 2,500 venture capital firms—the companies that finance and support start-ups—as well as customers in other fields, such as healthcare and private equity. SVB had partnered with approximately half of the venture-backed technology and healthcare companies in the US and thus was known as the financial partner of the innovation economy. The bank’s operations expanded to more than 12 countries. At the end of December 2021, technology and healthcare companies represented 24% of SVB’s total lending, while 9% of its total lending was to early-stage start-up companies.
Over the last ten years, SVB had performed well, with the value of its assets increasing from about $45 billion at the end of 2016, to nearly $115 billion by the end of 2020. Its assets continued to rise to about $209 billion by the end of 2022, after the bank purchased huge quantities of bonds over the previous two years, as did other banks, due to the influx of funds and investments from high-performing start-up companies. Meanwhile, SVB kept a small amount of deposits on hand and invested the remainder in order to increase its returns. At the end of 2022, the bank’s deposits totaled $175.4 billion.
In this context, the repercussions of the SVB crisis began to appear on Wednesday, March 8, when the bank announced the sale of a group of securities at reduced prices that incurred financial losses for the bank. SVB also issued about $2.25 billion in new shares to support its balance sheet and strengthen its capital base after its investment portfolio suffered a huge loss, alongside a rapid rise in interest rates and a record drop in the value of bonds in customers’ portfolios.
The following day, the bank’s shares collapsed amid failed attempts to save itself, either by trying to raise capital or find a buyer. Its parent company, SVB Financial Group—after announcing losses of about $1.8 billion on Thursday, after the sale of $21 billion in securities—appointed advisors to follow up on a possible sale. Then, on Friday morning, SVB shares were halted following a heavy sell-off in pre-market trading, which led to a 64% decrease in shares, to as low as $34.
The FDIC placed depositor funds under its control and pledged to cover them up to a maximum of $250,000. It also announced its intention to open bank branches so that depositors could withdraw the maximum of $250,000 from their savings in the short term, provided that this was done by the morning of Monday, March 13 at the latest.
The SVB crisis—which is the largest banking bankruptcy since the closure of Washington Mutual Savings Bank in 2008, and the second-biggest retail bank bankruptcy in the US—is linked to several motivating factors that accelerated the bank’s collapse, including the following:
1. The US government’s policy of monetary tightening: The US government’s policy of monetary tightening over the past year helped raise interest rates in 2022, with the goal of lowering inflation. This led to reduced financing for start-up companies. Before that, interest rates were close to zero, which helped banks avoid risks by owning long-term bonds. This became impossible after interest rates increased, leading to a drop in the value of assets, and banks incurred major losses. This in turn put enormous pressure on many customers, who asked the bank to withdraw their money, causing the bank to sell some of its investments just as their value was declining after the US Federal Reserve issued higher-yield bonds.
2. Increasing losses on sale of bonds: Although the bank expanded the purchase of treasury bonds, which are considered a safe investment for customer deposits, by nearly $91 billion, the rise in interest rates caused the bank to incur losses of about $15 billion, which represented the declining value of those bonds. This prompted the bank to announce its desire to sell an additional $2.25 billion in common shares and convertible preferred shares to bridge the gap in funding. This raised the fears of investors and depositors and pushed them to suddenly withdraw their deposits and money from the bank. The bank was compelled to resort to selling bonds before their maturity, at losses of about $1.8 billion, which led to a 60% collapse in the bank’s shares over the next two days before trading on the shares was suspended.
3. High cost of financing: The high cost of financing particularly affected the technology sector, making it vulnerable to losses. The rise in product prices contributed to rising costs in the technology sector, which reduced the value of tech company stocks. Bank cash flows from crypto companies or technology start-ups plunged, leading to fewer bank deposits and more cash withdrawals at a time when many banks’ long-term, non-cash assets were suffering a major drop in value.
4. The bank’s sector-specific exposure: The increased focus of SVB deposits on specific sectors, especially the technology sector, helped more than quadruple its volume of deposits in recent years, from $44 billion in 2017, to $189 billion by the end of 2021. Meanwhile, the bank’s loans to start-up companies grew from $23 billion to $66 billion. Given that banks reap profits from the difference between the interest paid on deposits and that paid by borrowers, the high volume of deposits at SVB compared to the volume of loans caused a funding gap whose solution required the bank to acquire other interest-bearing assets. This prompted the bank to invest about $128 billion at the end of 2021, most of it in high-priced mortgage and treasury bonds whose value quickly dropped after US interest rates rose.
The collapse of SVB has raised fears among many economic analysts and global financial circles that the crisis could spread to the global banking sector, in a repeat of the Lehman Brothers crisis that helped trigger the global financial crisis of 2008. The current repercussions of the SVB collapse include the following:
1. Threat to customers’ deposits: Decreasing venture capital financing and rising liquidity burn rate put increasing pressure on SVB customers, which led to a drop in total customer funds and deposits on the bank’s balance sheet. The bank also owned a group of term deposit accounts that prohibit the recovery of deposits until after 30 or 90 days have elapsed, according to the agreement. Thus, some customers have been unable to recover their money since the crisis started. With the bank’s bankruptcy and the FDIC controlling depositors’ money, the FDIC will only be able to cover depositors’ funds up to a maximum of $250,000, but there are no guarantees to restore the money of depositors who had larger sums in their accounts.
2. Growing losses in the US banking sector: SVB’s bankruptcy sparked customers’ fears about the impact on the rest of the US banking sector, which prompted some to withdraw their deposits from other banks. When one bank falters, depositors tend to rush to withdraw their savings from various banks, which has harmed some US banks. Shares of First Republic Bank in San Francisco and Signature Bank in New York dropped more than 20%. The suspension of SVB shares and the company’s abandonment of its efforts to raise capital led to the suspension of shares of other banks, such as First Republic, PacWest, Bancorp, and Signature Bank.
The four largest US banks lost $52 billion on the stock market, thus bringing the US banking sector’s losses to $100 billion over two days. Fears also surfaced that major speculators and short sellers would take over small banks, which would contribute to the high cost of financing.
3. Spread of the contagion to global banks: The closure of SVB has renewed investors’ fears about the health of the banking sector as a whole, especially with rapidly rising interest rates decreasing the value of bonds in their portfolios and increasing credit costs. The state of grave concern has extended to global markets, particularly among European banks, whose losses reached $50 billion amid fears of a recurrence of the global financial crisis of 2008. Europeans hurried to withdraw nearly GBP 30 billion ($36.1 billion) from their bank accounts, amid expectations that withdrawals would increase. The Stoxx Europe 600 Banks Index, which includes British lenders, fell 3.8%, thus shrinking the value of the index by EUR 33.5 billion ($35.7 billion). In Paris, Société Générale Bank lost 4.49%, BNP Paribas 3.82%, and Crédit Agricole 2.48%; while Germany’s Deutsche Bank lost 7.35% and Switzerland’s UBS 4.53%.
4. Worsening problems in the British banking sector: A large proportion of venture capital funds in the UK used SVB to transfer money to companies in their portfolios, who then withdrew them. As a result, many investors issued quick tips, with some recommending that companies withdraw their money immediately as the British banking sector was being impacted by the collapse of the American bank. Customer fears led to a drop in shares at major British banks, most notably a 4.6% drop in shares at HSBC Bank and a 4.5% drop in value at Standard Chartered Bank. Meanwhile, Barclays Bank shares dropped 3.7%, Lloyds Banking Group 3.3%, and NatWest Bank 2.5%. Insurance companies were also affected: Legal and General stock fell by 4.3%, and Aviva by 2.8%.
In this framework, Bank of England issued a formal statement that it will apply to place the SVB’s subsidiary in the UK into bankruptcy procedures, which would allow depositors to be paid GBP 85,000 ($110,200) from the Financial Services Compensation Scheme, and the company will stop making payments or accepting deposits.
5. Further losses for many technology companies: Many technology partnerships around the world suffered losses after the SVB crisis. The most prominent example of this may be Israeli companies, where SVB was the central financing institution for the Israeli tech industry. SVB financed more than 100 Israeli start-up companies and played a significant role in the high-tech sector in both the US and Israel. Many start-ups relied on SVB’s financial services, as well as tech giants like eToro, Redis, Verbit, Fireblocks, and Capitolis, and companies that have tried to withdraw their funds from the bank have been denied.
Thus, the repercussion of the SVB’s bankruptcy will leave a grave impact on the Israeli technology sector. In addition, many Israeli technology companies that wanted to protest the Israeli government’s law amending the judiciary withdrew their money from local Israeli banks last month and transferred it to SVB, thus deepening their losses and possibly leading to their collapse.
6. Declining value of cryptocurrencies and the digital dollar: The collapse of SVB may lead to the deterioration of many digital companies. For example, the digital dollar was negatively impacted after the bank collapse, and the digital currency company, Circle, which has $40 billion in USDC reserves, was unable to withdraw nearly $3.3 billion from SVB. This caused the stablecoin cryptocurrency to drop in value by about 11%, to trade at $0.9.
As far as start-up projects, Shelf Engine, a company that uses artificial intelligence to help grocery stores reduce food waste, was not able to withdraw its money from SVB, and the bank could not assist with processing checks and payments. Nor could Shelf Engine transfer its money to another bank. The bank’s collapse has contributed to lack of funding for start-up tech companies, and thus the companies are unable to cover their obligations and pay their workers’ salaries, which may prompt layoffs and put some tech companies at risk of collapse.
Finally, despite rising fears and warnings that the SVB crisis may not be an isolated case in the US banking sector and may cause a wave of losses, it is unlikely that the impacts of this bank failure will extend to the banking sector. Its effects will likely remain temporary and limited to certain sectors. Moreover, SVB is small compared to the largest American banks: with assets of $209 billion, it ranks 16 among American banks. By comparison, the assets of the largest American bank, J.P. Morgan, total $3.2 trillion. The major banks also maintain a high liquidity ratio against customer deposits, thus, SVB’s collapse will not have a negative impact. The US banking system is known for its resiliency and financial solvency, which allows it to contain the risks of contagion arising from the SVB crisis through prudent management of bank balance sheets and to avoid further monetary policy errors. This is confirmed by the success of major US banks’ shares, such as J.P. Morgan, Wells Fargo, and Citigroup, in restoring their growth as a result of SVB’s collapse.
Furthermore, since the global financial crisis of 2008-2009 and the bankruptcy of Lehman Brothers, banks have become obliged to provide strong guarantees to the European Securities and Markets Authority, and the European Banking Authority subjects fifty major banks on the continent to solvency tests. The results of the latest test of this sort, at the end of July 2021, revealed that financial institutions are able to weather economic crises without serious harm. British banks tend to maintain a minimum level of fixed-rate bonds in their liquidity portfolios, with most of the liquidity in the form of central bank cash. Much of the remaining liquidity is hedged against price movements, which minimizes the banks’ exposure to financial crises. Thus, the negative repercussions of SVB’s collapse are limited and temporary; the US banking sector is able to curb them, their impact on global financial circles will not rise to the level left by the Lehman Brothers collapse, and, thus, they will not contribute to the recurrence of an economic crisis like that of 2008.