Silicon Valley Bank’s (SVB) collapse last week has led to fears that other banks could face a similar fate amid record-high inflation and lending rates.
But what exactly led SVB to go under last week? Here’s what we know.
It hasn’t been just the Bank of Canada; the U.S. Federal Reserve has been raising interest rates from their record-low levels since last year in its bid to fight inflation.
Investors have less appetite for risk when the money available to them becomes expensive due to higher rates, which weighed on technology startups — the primary clients of SVB — because it made their investors more risk-averse.
Furthermore, tech companies have been hit hard in the past 18 months as the Federal Reserve has raised interest rates.
Higher interest rates caused the market for initial public offerings to shut down for many startups and made private fundraising more costly.
As a result, some SVB clients started pulling money out to meet their liquidity needs, resulting in SVB looking for ways last week to meet its customers’ withdrawals.
That brings us to what happened last Wednesday — March 8.
March 8: SVB sells off bonds
SVB had a US$21-billion bond portfolio consisting mostly of U.S. Treasuries — but holdings of government-backed bonds have fallen in value due to rising interest rates.
To fund their clients’ redemptions, SVB sold that portfolio on Wednesday.
It was yielding an average 1.79 per cent, far below the current 10-year Treasury yield of around 3.9 per cent. As a result, SVB took a US$1.8-billion loss, which it needed to fill through a capital raise.
March 9: Next comes the selling of stocks
On Thursday, SVB said it would sell US$2.25 billion in stock to fill its funding hole.
But its shares ended the trading day down 60 per cent in value with investors fearing the deposit withdrawals might push it to raise even more capital.
According to Reuters reporting, some SVB clients pulled their money from the bank on the advice of venture capital firms such as Peter Thiel’s Future Fund, spooking investors such as General Atlantic that SVB had lined up for the stock sale.
The capital-raising effort collapsed late on Thursday.
March 10: Silicon Valley Bank enters receivorship
SVB scrambled on Friday to find alternative funding, including through a sale of the company.
Later in the day, the Federal Deposit Insurance Corporation (FDIC) announced that SVB was being shut down and placed under its receivership. The unusual move, in the middle of the business day, spoke to how dire the situation had become.
The FDIC added that it would seek to sell SVB’s assets and that future dividend payments may be made to uninsured depositors.
But the uncertainty quickly spurred fears about what would happen to deposits above the $250,000 insured threshold, leading to worries that many tech firms that used the bank would be unable to even make payroll come Monday morning.
March 12: No bailout, but depositors will be protected
On Sunday morning, U.S. Treasury Secretary Janet Yellen told CBS’s Face The Nation that a federal bailout for the ruined bank was not in the works, but that officials were working on a plan to save depositors and restore confidence in the banking system.
Prominent Silicon Valley personalities and executives have been hitting the giant red “panic” button, saying that if Washington does not come to the rescue of Silicon Valley bank’s depositors, more bank runs are likely.
“The gov’t has about 48 hours to fix a soon-to-be-irreversible mistake,” Bill Ackman, a prominent Wall Street investor, wrote on Twitter. Ackman has said he does not have any deposits with Silicon Valley Bank but is invested in companies that do.
Some other Silicon Valley personalities have been even more bombastic.
“On Monday 100,000 Americans will be lined up at their regional bank demanding their money — most will not get it,” Jason Calacanis wrote on Twitter. Calacanis, a tech investor, has been close with Elon Musk, who recently took over the social media network.
After a dramatic weekend, U.S. regulators on Sunday announced their plan.
SVB customers will have access to all their deposits starting Monday, and regulators set up a new facility to give banks access to emergency funds. The U.S. Federal Reserve also made it easier for banks to borrow from it in emergencies.
Regulators also moved swiftly to close New York’s Signature Bank, which had come under pressure in recent days. Signature was a commercial bank with private client offices in New York, Connecticut, California, Nevada and North Carolina, and had nine national business lines, including commercial real estate and digital asset banking.
Silvergate Capital also said last week that it was voluntarily shutting down its bank. It served the crypto industry and had warned it could end up “less than well-capitalized.”
Meanwhile in Canada, the country’s banking regulator temporarily seized the assets of SVB’s lone Canadian branch in Toronto on Sunday night to protect the rights and interests of the branch’s creditors.
In a statement released Sunday, the Office of the Superintendent of Financial Institutions (OSFI) said SVB’s Toronto branch has been primarily lending to corporate clients, and that the branch does not hold any commercial or individual deposits in Canada.
Superintendent Peter Routledge said in the release that he has also given notice of an intention to seek permanent control of the Canadian branch’s assets, and is requesting the attorney general of Canada apply for a winding-up order.
OSFI said it has closely monitored SVB’s Canadian branch since the onset of the bank’s difficulties. It added that consistent with globally accepted international Basel III standards, it “continues to undertake diligent supervision of federally regulated banks in Canada, including robust requirements for capital and liquidity adequacy.”
Markets, however, tumbled after opening and fears remain about whether the fear and contagion of the bank failures will spread. The question for Monday and the rest of the week now appears to be: what will happen next?
— with files from Reuters and The Associated Press
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