What did SVB do:
Silicon Valley Bank was seen as the bank for the tech industry, with a prime location in Santa Clara, California. It was one of the top 20 banks in the United States and the largest bank to fail since the Great Recession in 2008, holding $200 billion in assets. It called itself the “financial partner of the innovation economy”, with it being the go-to bank for many tech companies and venture capital start-ups.
Why did they go bust?
The SVB collapse is very different to the Global Financial Crisis of 2008. Tech companies used SVB to deposit cash, but SVB made almost no loans, instead they invested the deposited cash in US government bonds, which are seen as a safe investment.
However, the rising interest rates caused the value of these investments to fall and with economic conditions turned sour for tech companies over the last year, many customers started drawing on their deposits. This left SVB with an inadequate amount of cash in hand, forcing it to sell investments at steep losses. The bank’s stock began plummeting on Thursday, and its trading was halted on Friday, with the bank being shut down soon after.
What happened as a response?
After intervention by California regulators, the bank was shut down and the Federal Deposit Insurance Corporation (FDIC) stepped in, effectively bailing out the depositors.
What happened in the UK?
Silicon Valley Bank has an arm in the UK (SVB UK), which was set to enter insolvency as a knock-on effect of its parent company’s collapse. While SVD UK had a limited presence in the UK, with only around 3,000 business customers, a collapse would have had a noticeable impact on the business world, with many important companies risking being wiped out if they were not able to pay their overheads.
On Monday, SVD was bought up by HSBC for £1, in a rescue deal facilitated by the Bank of England and HM Treasury. Thus, the risk of further collapse within the sector has been avoided and businesses can rest easy.
What are the longer-term consequences?
The collapse and its long-term implications are mostly confined to the US venture capital and tech sectors, meaning the UK should remain relatively unscathed, but central banks and regulators will need to weigh up the impacts of rate rises and higher inflation, to preserve stability in the economy.
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