Silicon Valley Bank collapses

Silicon Valley Bank collapses: a straightforward breakdown

In a shocking turn of events, the US has just suffered its second largest bank failure in history. But you can barely make heads or tails of this story with the amount of financial jargon being chucked around in the news. 

Here are the 4 things you need to understand, presented in a straightforward way:

1. SVB caters to Silicon Valley, aka technology companies

Silicon Valley Bank (SVB), as the name suggests, is a bank based in Silicon Valley, California. This area is deemed the home of fast-growing tech companies, many of which are responsible for the rapid growth of the global economy.

This means everyday folk like you and I wouldn't keep our funds with SVB. Instead, tech companies with millions in the bank (or not), would rely on SVB to hold their funds.

Business had been good for the bank; it had become the 16th largest in the US before it fell to its knees. 

2. SVB's bonds lost value thanks to interest rates rising

Like any other bank, SVB only keep a portion of their assets in cash, meaning they can become vulnerable if a considerable number of customers demand to withdraw their deposits. The bank invested heavily in government bonds, but the value of this investment fell when the Federal Reserve raised interest rates.

Interest rates rise to help combat inflation. In the UK, the Bank of England controls interest rates and the US equivalent is called the Federal Reserve.

Like the UK, the Federal Reserve increased interest rates to help lower inflation across the country. But, when rates rise, bonds often lose value which is partly why SVB had to sell its bonds at such a loss.

3. It all went wrong when SVB announced it was raising capital

On Wednesday 8th March, SVB announced it had sold $21 billion worth of bonds for a staggering $1.8 billion loss, as it needed to raise capital. Clients of the bank all came to the same conclusion - SVB didn’t have enough cash. Panic kicked in and many clients withdrew their deposits to be better safe than sorry, leading to a ‘bank run’.  

💡A bank run is when too many people try to withdraw their money from a bank all at once because they are worried that the bank may not be able to repay their deposits. When this happens, the bank may not have enough cash on hand to satisfy all the withdrawal requests, and the bank runs out of money.
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This is exactly what happened to SVB and people knew it. The stock price plummeted a monumental 60% in one day.

4. What does it mean for US and UK SVB clients?

US and UK clients of SVB are in slightly different situations, as things currently stand.

US clients

Deposits up to $250k are protected by the FDIC, but unfortunately only 2.7% of clients had deposits under this amount. 

Thankfully, for the remaining 97.3% of client deposits, Biden has promised action. The US Government has said depositors will be able to access their funds on Monday, even those who weren’t insured. 

UK clients

UK clients can breathe a slight sigh of relief, as HSBC has bought SVB's UK arm in a £1 rescue deal. It's a calculated risk by HSBC - on one hand it's likely it'll be the one that needs to fork out the cash. On the other it could be set to gain 3,000 clients with significant funds which would be great for long term growth.

So far, HSBC shares have slipped 3%. But will one bank's loss be another bank's gain? Time will tell.

As with all investing, your capital is at risk.

Shares App Ltd is an appointed representative of RiskSave Technologies Ltd, which is authorised and regulated by the Financial Conduct Authority (FRN 775330). Shares App Ltd is a company registered in England and Wales with company number 13374448.

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James Ashoo

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James has been investing for over five years. His aim is to explain the hard stuff, easily! When he's not chewing your ear off about stocks and crypto, he'll most likely be telling bad jokes.

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Harry Harrison

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