Batten down the hatches and prepare for stormy weeks ahead on the stock markets with the collapse of Silicon Valley Bank, the second-largest bank failure in US history days after it appeared for the fifth consecutive year on Forbes list of Best American Banks 2023.
When customers showed up at SVB’s branch in Manhattan yesterday to get their deposits back, managers called the police. Why?
There was a run on the Californian based bank with depositors rushing to withdraw $42 billion in deposits on Thursday.
Yesterday the FDIC (Federal Deposit Insurance Corporation) was appointed as receiver by the US bank regulator.
Bank employees were told to work from home and branches were closed. When some depositors turned up at the Manhattan branch and refused to leave until they got their money back, the police were called.
SVB finances close to half of all of the start-up American technology and healthcare companies, many of whom stand to lose significant deposits held by the bank.
The FDIC, an independent government agency that insures bank deposits and oversees financial institutions, said all insured depositors will have full access to their insured deposits by no later than Monday morning. It said it would pay uninsured depositors an “advance dividend within the next week.”
An estimated 96% of SVB deposits are not covered by insurance because they exceed the $250,000 threshold. The knock-on effect of technology and healthcare, start-ups losing their deposits will be felt in the weeks and months ahead.
At the core of this financial disaster is the fact that SVB invested a very significant amount of its deposits in mortgage based securities, an estimated $80 billion to be precise.
This appeared to be a safe bet when interest rates were close to zero.
However when the Federal Reserve began raising interest rates which now hover around 4.5%, the risk of mortgage defaults increased and these mortgage based securities lost value resulting in a shortfall between the money deposited by the bank’s customers and the value of the mortgage based securities purchased by the bank.
On Wednesday SVB announced that they had sold off some of these mortgage based securities at a loss and that it was going to try to raise more than $2bn to cover its loss.
This spooked depositors and resulted in the rush to withdraw deposits on Thursday.
Meanwhile, the knock-on effect resulted in the biggest American banks, including Bank of America collectively losing over $50 billion in share value in a single day’s trading as the spotlight is now being put on where they have invested customer deposits.
Bank shares across Europe took a hit also. Shares in AIB, Bank of Ireland, and Permanent TSB were down by more than 3% at the close of business on Friday.
Switzerland’s second-largest bank, Credit Suisse, which is already in trouble, saw an 8% reduction in its share price value this week closing yesterday at an all-time low of €2.50.
Outside the banking sector, Sweden’s largest pension group was SVB’s fourth-biggest shareholder at the end of last year.
Closer to home the state owned Ireland Strategic Investment Fund (ISIF) has around $100m invested in 5 investment funds that are managed by SVB Capital, a subsidiary of the SVB Financial Group.
We can predict with considerable certainty that we are in for a very turbulent period ahead on the financial front. It will eventually filter down to create lower living standards for ordinary people as happened in the wake of the 2008 financial crisis.
In conclusion, it’s said that a week is a long time in politics. A week is certainly a long time in the world of banking. On Monday last, SVB tweeted that it was proud to be listed on the Forbes best American banks for 2023. By Friday, the bank was no more.