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Silicon Valley Bank Collapsed. What happens now?
The collapse of Silicon Valley Bank (SVB) – the second largest bank failure since 2008’s financial crisis – has sparked concern among experts about a broader global banking crisis and its potential implications for the enterprise.
SVB, which served the tech industry for over three decades, collapsed on March 10, 2023, after suffering from an abrupt bank run driven by a sudden surge in interest rates.
The specialist bank, like many others at the time, had previously been raking in deposits as the tech industry boomed during the pandemic, eventually taking in more deposits than it could lend out to borrowers.
By the end of 2022, SVB was the 16th-largest bank in the United States with $209 billion in assets. Its downfall began when it invested heavily in treasury securities including long-term US government bonds and mortgage-backed securities (MBS).
At the time, this was considered a safe investment, but as interest rates rose to combat inflation, the prices of bonds dropped, causing SVB’s bond portfolio to plunge in value.
With these bonds being sold at a significant discount, the bank’s stocks plummeted by 70 per cent and it could no longer fulfil its customers’ withdrawal requests, eventually being shut down by regulators.
The US government's swift response in guaranteeing all of the bank’s deposits, paired with the Bank of England’s aid in the rapid sale of SVB’s British arm to HSBC has so far contained the fears of financial catastrophe.
But with SVB’s vulnerability to rising interests already being mirrored in several other global banks, finance experts warn that the crisis may not be over yet.
“There are darker days ahead for tech”
As the dust settles in the immediate aftermath of SVB’s collapse, the tech industry that had been the bank’s backbone finds itself shell-shocked.
Rattled entrepreneurs with investments in the bank were narrowly rescued by the government’s reprieve, with many of them thankful that their money was salvaged from the ruined bank.
But the gratitude for the deposit guarantees that will allow thousands of tech firms to continue to pay their workers is clouded moments of reflection among tech entrepreneurs and venture capital partners rattled by SVB’s downfall.
Even though all of Silicon Valley Bank’s depositors are being made whole, experts warn its demise will leave a void in the technology sector that may be difficult to fill.
“SVB’s failure will exacerbate headwinds facing the tech sector,” Deputy Chief Economist at abrdn, said in a LinkedIn post on Tuesday.
“Higher rates and changing spending patterns post-pandemic were already problematic for the sector, and this knock to confidence won't help.”
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Other experts agree. With Silicon Valley Bank gone and venture capitalists pulling in their reins, Dan Ives, analyst of Wedbush Securities, believes that the effects of its collapse will be felt across the technology landscape for years to come.
“With SVB, in essence, the Godfather of the Silicon Valley banking ecosystem for the past few decades in the tech world, we believe the negative ripple impact of this historical collapse will have a myriad of implications for the tech world going forward,” Mr Ives said in a Tweet on Tuesday.
With SVB in essence the Godfather of the Silicon Valley banking ecosystem for the decades in the tech world, we believe the negative ripple impact of this historical collapse will have a myriad of implications for tech. More pressure on tech startups/cash burn/valuation haircuts
— Dan Ives (@DivesTech) March 14, 2023
Mr Ives told Yahoo! News said that one of these implications will be that the tech sector be divided into winners and losers, with Big Tech devouring smaller companies.
“With this black-eye collapse, I believe it's going to accelerate mergers and acquisitions, and it's going to have clear winners and losers. I think big tech's probably a winner in terms of from a Merger and acquisition perspective, but clearly, there are some darker days ahead with the Daddy Warbucks of Silicon Valley banking gone,” Mr Ives said in an interview with Yahoo! News.
“I believe big tech, they're sort of right now sharpening their pencils because there's a lot of companies that if you can't get those lines of credit from an SVB, you're going to have much more scrutiny in just this environment that we're seeing. I think it's going to be a bonanza of M&A that ultimately comes out of this over the next 6 to 12 months in tech,” he added.
Regulatory action on banks to be expected
While the government’s action may have saved SVB, it is likely more banks will fail as a consequence of the continued financial bleeding that continues in financial institutions across the globe.
New York based Signature Bank also collapsed on Sunday and was seized by regulators with more than $110 billion in assets, making it the third largest bank failure in US history.
Bank shares in the US, Asia and Europe have slumped following the collapse of SVB and Signature Bank, with investors fretting about the general state of the banking sector.
Since most banks spread their exposure across several sectors and also have plenty of cash on hand, the risk to the rest of the banking sector is low.
But the collapse of the two banks led to investors losing confidence in the banking system despite recent increases in interest rates and swift government action.
“The current debacle raises concerns on net interest margin outlook given extreme yield curve inversion and the need for higher incentives to prevent potential deposit flight, Najet Mui, Head of Market Analysis at RBC Brewin Dolphin wrote in a LinkedIn Post.
“Lending appetite is going to be hurt, against the backdrop of tightening lending standards we observed from the Fed Senior Loan Officer Survey. That raises the probability of a recession, which doesn't bode well for banks as they will have to make higher bad debt provisions.”
To avoid the risk of a recession, experts note that banks may be subject to more regulatory provisions to bring confidence back to the banking system.
“While the hedge funds have been noting for quite some time (since Spring 2020) the risks related to financial institutions and Central Banks' interest rate rises, it seems the #regulators on both sides of the Atlantic are caught somewhat by surprise, Scott Newton, Managing Partner of Thinking Dimensions said in a post to LinkedIn.
“My expectation is an increased focus on regulators combined with a revisit to the stress tests on financial institutions and their ability to withstand external shocks.”