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The closure of SVB Financial Group Inc and the takeover by banking regulators last Friday comes as the US Federal Reserve raised interest rates and soured investors’ risk appetite. Timeline of the biggest banking collapse since 2008.
A sequence of events led to the bankruptcy of Silicon Valley Bank and the subsequent intervention of the US authorities, who did the same with Signature Bank.
The president of the United States, Joe Biden, gave savers a piece of peace of mind and assured that their money is “guaranteed”, while the world’s financial authorities monitor the situation closely to avoid contagion.
It all started with the rate hike…
Since last year, the Federal Reserve has been raising interest rates from their pandemic record lows in an attempt to combat inflation. When that happens, investors have less appetite for risk, as access to money becomes more expensive.
This situation in particular affected technology startups, Silicon Valley Bank’s main clients. High interest rates discouraged public offerings of stocks or bonds, so some clients of the 16th largest US lender began withdrawing money to meet their liquidity needs, rather than going to the stock market.
In its search for money to meet client withdrawals, Silicon Valley Bank decided to dump $21 billion in Treasury bonds it had invested in years earlier. The rule is that when interest rates go up, bond prices go down.
With cheaper and less desirable bonds, this bank had to assume a loss of more than 1.8 billion dollars that it needed to cover through a capital increase.
Failed sale of shares generates a “bank run”
SVB launched a $2.25 billion share issue last Thursday to fill its funding hole. But the initiative failed and its shares ended up trading for the day down 60%.
On Wall Street, a rumor is enough to generate a massive withdrawal of savings. Some frightened clients of SVB withdrew their money on the advice of certain venture capital firms, causing the capital-raising effort to collapse on Thursday night.
After failed attempts by the bank to find alternative financing, including through the sale of its assets, the Federal Deposit Insurance Corporation (FDIC) took the company into receivership.
With Reuters and AP
