However, the risk of contagion to the rest of the financial system remains limited
The collapse of Silicon Valley Bank (SVB), while it is an important development, does not represent a systemic risk to the financial system, which is much more resilient than it was in 2008. However, firms should expect continued volatility in financial markets in the short term, as the consequences of the bank’s failure become clearer. As a result, expect conservative policy moves from the US Federal Reserve, including a 25-basis-point hike at its next meeting. MNCs working with tech/healthcare companies should ask about the exposure of their partners to SVB and assess any potential risk. Over the medium term, firms should expect SVB’s collapse to be a drag on funding, and therefore innovation, in the tech and life sciences sectors.
Overview
- On March 10, SVB, a regional bank that worked mostly with tech and healthcare start-ups, collapsed.
- Silicon Valley Bank was the 16th-largest bank in the US in terms of assets, which were worth over US$ 200 billion, and was a banking partner to around half of US VC-backed start-ups. This makes it the largest failure of a US bank since Washington Mutual in 2008.
- During the pandemic, SVB became flush with money, as tech companies, who received huge amounts of investment, deposited their funds into the bank. Looking for yields on these deposits, SVB invested a sizable portion of these deposits into US Treasuries and mortgage bonds.
- When the Fed rapidly increased rates in 2022, two things happened: first, tech companies were receiving less investment and started drawing on their deposits at SVB. Second, higher rates meant that the value of SVB’s low-yielding Treasuries were suddenly worth much less than they had been bought for.
- When the bank announced it was raising capital to cover these losses, depositors panicked and started withdrawing their funds; SVB collapsed when it was unable to meet these withdrawal requests. Given that 96% of deposits into SVB were uninsured, there were concerns over exposure to the bank.
- On March 13, the US Treasury said it would not be bailing out SVB. However, it introduced a package that would give all depositors into SVB access to their money, as well as a lending facility to other regional banks, which would prevent them from having to sell bonds at a loss to meet withdrawal requests.
Our View
The collapse of Silicon Valley Bank sent ripples through the financial system, both in the US and in the rest of the world. However, the risk of broad contagion to the financial system and to the rest of the economy is limited, and a repeat of the 2008 crisis is therefore unlikely. Still, that is not to say that the collapse of SVB will have no impact.
While big, systemic banks, who are better capitalized in part due to stricter regulation, run little risk, smaller regional banks are more exposed—they hold a lot of bonds purchased during the pandemic, and many of their deposits are also uninsured. However, the risk of investor panic triggering a bank run was greatly reduced by the Treasury’s emergency lending measures, which effectively act as a backstop. Still, there remains some nervousness when it comes to regional banks, as reflected in their share prices, and volatility will likely continue in the short term.
Early-stage tech and healthcare start-ups are most at risk from the collapse of SVB. While the biggest issue, liquidity pressures stemming from the inability to access deposits, was addressed thanks to the Treasury’s package, it is the medium- to long-term outlook that is concerning. SVB was an important lender to many early-stage businesses, and its collapse will further starve the tech sector of funding.
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