1:46 p.m. ET, March 13, 2023
Find out the latest on the collapse of Silicon Valley Bank – and its aftermath
From CNN’s Hanna Ziady
(David ‘Dee’ Delgado/Reuters)
Bank of Silicon Valley collapsed at incredible speed on Friday. And while the US federal government has stepped in to guarantee customer deposits, its fall continues to reverberate through global financial markets – as seen in the subsequent closure of Signature Bank – and investors wonder if its disappearance could trigger a wider banking collapse.
Why did it collapse? : The origin of his disappearance goes back several years. As many other banks, SVB invested billions in US government bonds in the era of near-zero interest rates. What appeared to be a safe bet quickly unblocked as the Federal Reserve aggressively raised interest rates to keep inflation under control.
When interest rates rise, bond prices fall, so rising rates have eroded the value of SVB’s bond portfolio. The portfolio had an average yield of 1.79% last week, well below the 10-year Treasury yield of around 3.9%, Reuters reported.
At the same time, the Fed’s hike frenzy has pushed up borrowing costs, meaning tech startups have had to funnel more cash to pay down debt. At the same time, they were struggling to raise new venture capital funds. This has forced companies to tap into deposits held by the SVB to fund their operations and growth.
Then the bank ran: When SVB announced it had sold a bunch of stocks at a loss and would be selling $2.25 billion in new shares to fill the hole in its finances, customers panicked and withdrew their money in droves. .
The bank’s stock fell 60% on Thursday and dragged other bank stocks down with it. On Friday morning, trading in SVB shares was halted and it abandoned efforts to raise capital or find a buyer. California regulators stepped in, closing the bank and placing it in receivership under the Federal Deposit Insurance Corporation, which usually means liquidating the bank’s assets to pay off depositors and creditors.
In an effort to prevent further bank runs and help businesses pay their staff and finance their operations, US regulators said Sunday that they would guarantee all deposits of SVB customers. The intervention does not amount to a 2008-style bailout, which means investors in the company’s stocks and bonds will not be protected.
In Europe, the benchmark Stoxx Europe 600 Banks Index, which tracks 42 major European and UK banks, fell 5.6% in morning trade, posting its biggest decline since last March. Shares of struggling Swiss banking giant Credit Suisse fell 9%.
The SVB is not the only financial institution whose investments in government bonds and other assets have fallen dramatically. By the end of 2022, U.S. banks were sitting on $620 billion in unrealized losses — assets that have fallen in price but have yet to be sold, according to the FDIC.