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Home Africa News

The second-largest bank collapse in US history just happened. Should

by michele redner
March 13, 2023
in Africa News
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Key PointsDepositors rushed to withdraw cash following a failed capital raise attempt by SVB, leading to its sudden collapse.SVB was heavily exposed to the tech industry but the chance of contagion in the broader banking sector is limited.US authorities unveiled sweeping measures to rescue depositors’ money in full from the failed bank.California-based Silicon Valley Bank (SVB) dramatically collapsed following a customer run on its deposit base last week, marking the second-biggest collapse of a financial institution in US history since the fall of Washington Mutual at the height of the global financial crisis.

Little known to the general public, SVB specialised in financing tech startups and had become the 16th largest US bank by assets. At the end of 2022, it had US$209 billion (A$315 billion) in assets and approximately US$175.4 billion (A$264 billion) in deposits.

The company previously boasted that “nearly half” of technology and life science companies that had US funding banked with them, leading many to worry about the possible ripple effects of its collapse.

What was behind the collapse?

SVB’s declaration of insolvency followed interest rate hikes that hurt its startup customers and a failed capital raise attempt, spurring deposit withdrawals.

SVB came under extreme liquidity pressure following the release of its full-year accounts in late February, where it reported sharp falls in the market value of its investment portfolios.

As the bank tried to raise capital and find additional investors, trading in the bank’s shares was halted due to extreme volatility on Friday.

Shortly thereafter, the Federal Deposit Insurance Corporation (FDIC) moved to shutter the bank, not waiting until the close of business. The FDIC could not immediately find a buyer for the bank’s assets, signalling how fast depositors had cashed out.

Dean of the Faculty of Business and Economics at the University of Melbourne, Professor Paul Kofman, said the bank was distinctly vulnerable to interest rate rises.

“Typically, the tech firms are characterised by high growth potential but low cash, that’s making them particularly vulnerable to interest rate rises,” Professor Kofman said.

Another global financial crisis?

In 2007, the biggest financial crisis since the Great Depression rippled across the globe after mortgage-backed securities tied to ill-advised housing loans collapsed in value.

The panic on Wall Street led to the demise of Lehman Brothers, a firm founded in 1847. Because major banks had extensive exposure to one another, it led to cascading breakdown in the global financial system, putting millions out of work.

SVB was heavily exposed to the tech industry, but there is little chance of chaos spreading in the broader banking sector, as it did in the months leading up to the recession more than a decade ago.

Professor Kofman said while it’s the biggest single bank failure since the 2008 Washington Mutual collapse, this is a case of individual bank failure that doesn’t share the global dimensions of the 2008 financial crisis.

But he said it puts a spotlight on the tech sector’s insecurity.

“I think it’s a bit of a wake up call [as to] what this tech sector is all about. People … mostly see the riches — the unicorns. But what they forget is [that] there’s typically a large fallout, and this fallout has just increased with increasing interest rates.”

Should Australia be worried?

Federal Treasurer Jim Chalmers said in a statement to media outlets that Australians should be reassured by the stability of our banking institutions. He added that Australia is “in a better position” to deal with the challenges of the global economy than it was in 2008.

Professor Kofman said Australia’s banks are more secure due to less concentration compared to the United States.

But he said there would still be consequences for individual finances, particularly when it came to superannuation funds, which make significant investments in high-risk tech companies when interest rates are low.

Federal Treasurer Jim Chalmers said Australia is in a better position to deal with global economic turmoil. Source: AAP / Mick Tsikas

“There is definitely a spillover effect into the global economy at large, in the sense that we’re all invested in the tech sector, and banks like the Silicon Valley Bank are just a conduit of that.”

“Our superannuation funds would get a hit if the tech firms are doing poorly, which they are at present. So that’s the high-level impact on customers around the world.”

Impact in other parts of the world

British tech companies are already confronting a fallout from the bank’s insolvency. More than 250 UK tech firm executives signed a letter addressed to Chancellor Jeremy Hunt on Saturday calling for government intervention.

Mr Hunt says the government is treating the issue with the highest priority, and that the Bank of England is seeking a court order to place the British SVB into insolvency.

He reassured the general public that there is no systemic financial risk following the collapse.

Israel has also been left vulnerable by the collapse as the tech sector is the country’s main area of growth, with many startups hosting accounts at SVB.

What’s next?

US authorities unveiled sweeping measures on Sunday to rescue depositors’ money in full from the failed bank and to promise other institutions help in meeting customers’ needs, as they announced the closure of a second tech-friendly bank.

In a joint statement, financial agencies including the US Treasury said SVB depositors would have access to “all of their money” starting 13 March, and that American taxpayers would not have to foot the bill.

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The announcement came as Signature Bank, a New York-based regional-size lender with significant cryptocurrency exposure, was closed on Sunday by regulators. The US Federal Reserve, the FDIC and Treasury said depositors in Signature Bank would also be “made whole.”

The failure of SVB will also likely lead to a fall in trust in banks.

Professor Kofman says that “every time this happens, there is a loss of confidence in banks and the banking system at large, and that typically triggers [an] increased regulatory drive. And regulation is expensive, so that affects us as well.”

Additional reporting by Catriona Stirrat.

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