On 10th March, California-based Silicon Valley Bank experienced the biggest failure of an American financial institution for 15 years. It triggered further difficulties for lenders across the globe, and worries for one of Europe’s troubled institutions, Credit Suisse.
While unheard of by most Brits, SVB was the 16th largest bank in the US by deposits and was renowned by tech startups in the US.
What happened?
Customers of Silicon Valley Bank (SVB) were withdrawing their funds frantically amid circulating rumours of the bank’s impending crash. This happened before US regulators were able to intervene and take control of the situation.
Its collapse panicked the currency markets and heaped pressure on other banks struggling with the consequences of the worldwide cost-of-living crisis and rising interest rates.
Silicon Valley Bank lost billions of dollars in the collapse and had to cash out government bonds to pay depositors their money. The Californian institution decided to sell $21 billion of its securities portfolio, in an attempt to meet lender obligations. This was unsuccessful, and the bank sold said securities at a loss of $1.8 billion.
The currency markets were certainly volatile during this time, however performed well despite the fall of SVB. The US dollar took a sharp hit as shares in SVB fell early last week, which you can read about in our daily currency note. But since the collapse of Silicon Valley Bank, the currency markets have been steady. If anything, this situation has taught us that it all can change at the drop of a hat.
The fallout since 10th March
12th March: Two days later, the US government’s Federal Deposit Insurance Corporation (FDIC) took control of Silicon Valley Bank. The governmental institution referenced SVB’s fall as, “the biggest banking collapse in America since Washington Mutual in 2008.”
The FDIC shut down New York-based Signature Bank after its customers were spooked by the collapse of SVB. CNN reported that both Signature and SVB has, “an unusually high ratio of uninsured deposits to fund their businesses.”
This information was confirmed on each bank’s balance sheets. 5% of Signature’s assets were in cash and SVB had 7%, compared to the industry average of 13%.
15th March: Shares in Credit Suisse collapsed by 30% and Swiss authorities announced a backstop for the country’s second largest bank. This calmed the market on an immediate level, but a sense of contagion verging on global panic is growing.
16th March: San Francisco-based bank First Republic Bank teetered on the edge of collapse as customers also began to withdraw their deposits. Following recent events, regulators were quick to act and US Treasury Secretary Janet Yellen and CEO of JPMorgan Chase, Jamie Dimon drew up plans for a private sector rescue. First Republic Bank (FCB) shares jumped 20% following talks of said rescue and as of this morning (21st March) FCB’s shares have rebounded from record lows.
The aftershock of SVB’s collapse clearly impacted customer confidence in regional banks as well as other parts of the financial market.
This includes US tech stocks which have performed well despite the reverberations of volatility that the sheer speed of SVB’s collapse caused.
How did the UK react?
The UK arm of SVB was acquired by HSBC late last week for just £1 in a deal brokered by the Bank of England and government ministers. Customer deposits remain protected and no public money was used to save it.
Following the Credit Suisse shock, Rishi Sunak said he believed the UK banking system remains safe from contagion. Max Blain, the prime minister’s official spokesperson told reporters, “We do believe we have a robust system, a strong system.”
What is a banking crisis?
The World Bank documents, ‘a systemic banking crisis occurs when many banks in a country are in serious solvency or liquidity problems at the same time—either because there are all hit by the same outside shock or because failure in one bank or a group of banks spreads to other banks in the system.
More specifically, a systemic banking crisis is a situation when a country’s corporate and financial sectors experience many defaults and financial institutions and corporations face great difficulties repaying contracts on time.’
If you’re concerned about market volatility, call your Personal Trader on 020 7898 0541 to discuss the best way to protect your currency against the risks of sudden market movements.
