After a stunning 48 hours in which a bank run and a capital crisis resulted in the second-largest financial institution failure in US history, Silicon Valley Bank collapsed on Friday morning in New York .
The tech lender was shut down by regulators in California and handed over to the US Federal Deposit Insurance Corporation. The FDIC is acting as a receiver, which typically indicates that it will liquidate the bank’s assets in order to reimburse its depositors and creditors.
What took place?
The Federal Reserve’s aggressive interest rate increases over the past year are partially to blame for Silicon Valley Bank‘s decline.
The central bank began a series of historic rate hikes last spring to raise borrowing costs for individuals and businesses, aiming to cool the economy and bring inflation in line after years of hovering around zero.
Mark Zandi, chief economist at Moody’s, stated that higher rates have a particularly negative impact on the tech sector, lowering the value of tech stocks and making it more difficult to raise funds. As a result, many tech companies used their SVB deposits to fund their operations.
Zandi stated, “The value of their treasury and other securities that SVB needed to pay depositors has also decreased due to higher rates.” The FDIC was forced to take over SVB as a result of the run on their deposits caused by all of this.
Reminiscences of 2008
Despite the initial panic on Wall Street over the run on SVB, which sent its shares plunging, analysts stated that the bank’s collapse is unlikely to trigger the same kind of domino effect that engulfed the banking sector during the financial crisis.
Zandi asserted, “The system is as well-capitalized and liquid as it has ever been.” The troubled banks are far too insignificant to pose a significant threat to the overall system.
However, Ed Moya, a senior market analyst at Oanda, believes that smaller banks that are disproportionately associated with cash-strapped industries such as technology and cryptocurrency may face challenges.
Moya asserted that “everyone on Wall Street knew that the Fed’s rate-hiking campaign would eventually break something,” and that “right now that is taking down small banks.”
The FDIC reports that the company’s total assets stood at $209 billion at the end of last year, causing the stock to fall for a second day.
Since the demise of Washington Mutual in 2008, it is the largest lender to fail.
Nearly half of all venture-backed tech and health care companies in the United States collaborated with the bank, and many of them withdrew their deposits.
Friday morning, SVB‘s shares were stopped after falling more than 60% in premarket trading. After the bank said it had to sell a portfolio of US Treasuries and $1.75 billion in shares at a loss to cover rapidly declining customer deposits, the stock fell 60% on Thursday, effectively putting the bank in danger of a run.
First Republic, PacWest Bancorp, and Signature Bank are among the other bank stocks that were temporarily suspended on Friday.
The panic appeared to subside by Friday. Bank stocks continued to be mostly lower but stable.
Mike Mayo, Wells Fargo senior bank examiner, said the emergency at SVB might be “a particular circumstance.”
“This is night and day versus the global financial crisis from 15 years ago.” “Banks were taking excessive risks, and people thought everything was fine,” he stated at the time. Everyone is worried now, but the banks are more resilient than they have been in a generation beneath the surface.”
Rate climbs take a chomp
SVB‘s unexpected fall reflected other dangerous wagers that have gotten uncovered in the previous year’s market strife.
After being financially battered by the turmoil in digital assets, the crypto-focused lender Silvergate announced on Wednesday that it will liquidate the bank and cease operations. Another crypto-friendly lender, Signature Bank, was hard hit by the bank selloff; its shares fell 30% before being suspended for volatility on Friday.
“SVB‘s institutional difficulties are a reflection of a systemic problem that is larger and more widespread: The co-founder of Klaros Group, Konrad Alt, wrote, “The banking industry is sitting on a ton of low-yielding assets that, thanks to the last year of rate increases, are now far underwater — and sinking.”
“effectively wiped out approximately 28% of all the capital in the banking industry as of the end of 2022,” Alt estimated.
At the point when financing costs were close to nothing, banks stacked up on lengthy dated, okay Depositories. However, as the Federal Reserve raises interest rates to combat inflation, their value has decreased, leaving banks with unrealized losses.