Silicon Valley Bank's Collapse Sparks Fears of Banking Crisis

The collapse of Silicon Valley Bank (SVB) has sparked fears of a banking collapse, particularly in the start-up tech and cryptocurrency sectors. SVB’s failure was partly due to challenging conditions brought on by the Federal Reserve’s aggressive interest rate hikes. Its demise could lead to a loss of investor and bank confidence, stricter regulation, and an increase in investor scepticism about crypto ventures.

Contagion talks and fears of a banking collapse have ripped through markets following the shock undoing of Silicon Valley Bank (SVB) throwing the tech and banking sector into abyss once again.

Following years of banking stability, last Friday’s failure was the first banking collapse since 2008’s GFC, raising concerns on whether the Federal Reserve’s aggressive series of interest rate hikes has  caused irreparable damage that is yet to play out.

While any contagion effects spreading to the wider banking sector have been played down, the start-up tech and cryptocurrency sectors are at most risk.

“SVB specialised in banking for tech startups. It provided financing for almost half of US venture-backed technology and healthcare companies,” as reported by CNN. “While relatively unknown outside of Silicon Valley, SVB was among the top 20 American commercial banks, with US$209 billion ($317 billion) in total assets at the end of last year, according to the FDIC.”

The failure of SVB is partly due challenging conditions brought on by a series of the Fed’s aggressive interest rate hikes that caused a change in sentiment prompting investors to move out of risk assets such as start-ups, private equity and crypto and into safe-haven U.S. Treasurys.

Being a tech and start-up focused bank, rising interest rates created the negative affect on valuations, creating a flow of funds out of the bank, similar to a bank run.

The issue was further compounded when SVB was forced to sell off its longer term bond holdings trading at a loss as it tried to stay afloat. SVB had invested its funds in long-dated assets, which included 10 year mortgage backed securities. As interest rates rose, bond prices fell. These bonds tumbled in value. 

Normally, bonds wouldn’t have been sold at such a loss, but SVB was forced to sell when depositors started to recall their funds. 

Paul Ashworth, chief North American economist at Capital Economics told media that, “losses on hold-to-maturity securities at commercial banks are unlikely to become a systemic issue. FDIC deposit insurance will prevent runs on most banks, while those that need to raise cash can use the Fed’s repo facility and discount window or take a Federal Home Loan Bank loan to avoid realizing losses. And most banks have presumably hedged their interest rate risk in the swaps market, he said.

SVB’s demise could lead to a loss of investor and bank confidence, a lack of funding in the start-up VC space, stricter regulation and an increase in investor scepticism about crypto ventures.

According to the AFR, “Australian venture capital companies whose portfolios of companies held accounts with SVB, include Blackbird, King River, Main Sequence, Square Peg and Airtree. Only 2.7 per cent of the bank’s overall customers held deposits of less than the guaranteed $US250,000.”

In the end a loss of investor confidence combined with high levels of uninsured deposits and unrealised losses that magnified as interest rates rose, all contributed to SVB’s collapse. Regulators are now keeping a close eye on the remaining banks in Wall Street that may have similar characteristics as SVB, to ensure the problem isn’t systemic.

In total, Silicon Valley Bank had US$209bn in total assets and about $US175.4 billion in total deposits before being placed into administration by US regulators on Friday.