The collapse of Silicon Valley Bank (SVB) last week led to fears that other banks could face a similar fate amid record high inflation and lending rates.
But what exactly got SVB going last week? Here’s what we know.
A branch of a Silicon Valley bank in Toronto has been seized by Canada’s banking regulator for collapse
It was not only the Bank of Canada. The US Federal Reserve has been raising interest rates from record lows since last year to fight inflation.
Investors have less appetite for risk when their available money becomes more expensive due to higher interest rates, which has affected tech startups, SVB’s main clients, as it makes them more risk-averse investors.
SVB’s Canadian branch has temporarily frozen the assets
Moreover, tech companies have been hit hard over the past 18 months as the Federal Reserve has raised interest rates.
Higher interest rates have caused the initial public offering market to close for many startups and made private fundraising more expensive.
As a result, some of SVB’s clients began withdrawing money to meet their liquidity needs, prompting SVB last week to look for ways to accommodate its clients’ withdrawals.
That brings us to what happened last Wednesday, March 8th.
March 8: SVB sells bonds
SVB had a bond portfolio of US$21 billion, mostly US Treasuries, but its holdings of government-backed bonds have been eroded by rising interest rates.
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To fund repayments to its clients, SVB sold that portfolio on Wednesday.
It averaged 1.79 percent, well below the current 10-year Treasury yield of around 3.9 percent. As a result, SVB suffered a loss of US$1.8 billion, which had to be made up through a capital increase.
March 9: Next comes the stock sale
On Thursday, SVB said it would sell US$2.25 billion in shares to plug its funding hole.
But its shares ended the trading day down 60 percent as investors feared that withdrawals could force it to raise more capital.
According to a Reuters report, some of SVB’s clients have pulled their money out of the bank on the advice of venture capital firms such as Peter Thiel’s Future Fund, scaring investors such as General Atlantic that SVB has lined up a stake sale. for:
An effort to raise capital fell through late Thursday.
March 10: Silicon Valley Bank goes into receivables
SVB tried to find alternative financing on Friday, including through the sale of the company.
Later, the Federal Deposit Insurance Corporation (FDIC) announced that SVB was being closed and placed under receivership. The unusual move in the middle of a workday spoke volumes for how dire the situation was.
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The FDIC added that it would seek to sell SVB’s assets and that future dividend payments could be made to uninsured depositors.
But the uncertainty quickly raised concerns about what would happen to deposits above the $250,000 insured threshold, leading to concerns that many tech companies that used the bank would not even be able to make payroll on Monday morning.
March 12: No relief, but depositors will be protected
US Treasury Secretary Janet Yellen told CBS on Sunday morning Against Nation that no federal bailout was in the works for the collapsed bank, but officials were working on a plan to rescue depositors and restore confidence in the banking system.
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Silicon Valley luminaries and executives are hitting the giant red “panic” button, saying that if Washington doesn’t help Silicon Valley bank depositors, more bank runs are likely.
“The government has about 48 hours to fix this soon-to-be-irreversible mistake,” Wall Street investor Bill Ackman wrote on Twitter. Ackman said he has no deposits in a Silicon Valley bank, but is invested in companies that do.
Some other Silicon Valley personalities have been bombarded even more.
“On Monday 100,000 Americans will line up at their regional bank demanding their money, most won’t get it,” Jason Kalakanis tweeted. Kalakanis, a tech investor, has been close to Elon Musk, who recently took over the social network.
After a dramatic weekend, US regulators announced their plan on Sunday.
SVB customers will have access to all their deposits from Monday, and regulators set up a new facility to give banks access to emergency funds. The US Federal Reserve has also made it easier for banks to borrow from it in emergency situations.
Regulators also moved quickly to shut down New York’s Signature Bank, which has 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 announced last week that it was voluntarily closing its bank. It served the crypto industry and warned it could end up “less than well capitalized.”
World National: March 11
Meanwhile in Canada, the country’s banking regulator temporarily seized the assets of SVB’s only 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 primarily lends to corporate clients and that the branch does not have any commercial or individual deposits in Canada.
Superintendent Peter Rutledge said in a statement that he has also given notice of his intention to seek permanent control of the Canadian branch’s assets and is asking the Attorney General of Canada to apply for a winding-up order.
OSFI said it had closely monitored SVB’s Canadian branch since the bank’s troubles began. It adds that in line with international Basel III standards, it “continues to maintain diligent oversight of federally regulated banks in Canada, including robust capital and liquidity adequacy requirements.”
Markets fell after the open, however, and concerns remain about whether the fear and contagion of bank failures will spread. The question for Monday and the rest of the week now seems to be: what happens next?
— With files from Reuters and The Associated Press