Silicon Valley Bank meltdown: What, why and how?

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The US banking crisis weighs on the broader markets, with global financial markets flashing red across the board and the slide in banking stocks deepens as contagion risks from the collapse of Silicon Valley Bank (SVB) rattles markets.

Over the weekend and Monday, the US Federal Reserve and the Treasury took steps to stabilise the banking system, but concerns over the fallout from the collapse of SVB persisted despite those actions by regulators.

At least half a dozen banks were looking to contact Silicon Valley Bank shortly after its collapse became the biggest debacle of a financial institution since the 2008 economic crisis, according to a Reuters report.

Experts are now predicting more pain for global banks and the financial sector worldwide.

The dramatic collapse of Silicon Valley Bank in the United States led to frantic developments in Britain as authorities scrambled to take charge of the situation, a latest report has revealed. 

A Reuters report claimed that at least half a dozen banks were looking to contact Silicon Valley Bank shortly after its collapse became the biggest debacle of a financial institution since the 2008 economic crisis.

HSBC’s buyout of Silicon Valley Bank

On Monday, Europe’s largest bank, HSBC, announced it was buying SVB UK.

SVB UK reportedly has assets of around 5.5 billion pounds and deposits of around 6.7 billion pounds. The quick buyout reflected fiercely urgent concerns that SVB’s potential failure could reverberate throughout the UK’s start-up industry. 

“Whether HSBC’s acquisition proves to be successful will largely come down to the asset quality of the loan book, which cannot be assumed to be good, given the early-stage nature of many of the borrowers,” Jerry del Missier, former Chief Operating Officer at Barclays, and now Chief Investment Officer at Copper Street Capital, was quoted as saying by Reuters. 

Bank of England considered seeking insolvency for SVB UK: Report

According to Reuters, the Bank of England, during its initial few hours of action, also sought insolvency in the event there was no buyer out there for SVB UK. The sense of uneasiness began because NatWest, SVB UK’s clearing bank in Britain, had halted processing transactions, the report added.

The U.S. Federal Deposit Insurance Corporation had also shut off access to the parent company’s technology platform, the report added while citing a relevant source. It simply meant that the potential bidders and treasury officials called both the FDIC and NatWest over the weekend to get SVB UK running again.

As the crisis deepened, on Sunday morning finance minister Jeremy Hunt sought to reassure Silicon Valley Bank’s customers in Britain that the government was working on a solution.

The 30 minute deadline

As the Silicon Valley Bank crisis broke out, the United Kingdom Prime Minister Rishi Sunak was en route to San Diego on an over 15-hour long flight.

HSBC’s team including CEO Noel Quinn and UK CEO Ian Stuart began closer scrutiny of SVB UK that afternoon, Reuters reported while citing a source familiar with the matter.

By early evening on Sunday, officials from the Treasury gave potential bidders a final 30 minutes to submit their offers.

Officials from the Bank of England and Treasury along with board members from SVB UK were then locked in talks.

Meanwhile, in the United States, regulators moved to protect SVB depositors, as well as implementing wider measures to shore up confidence in the banking system.

Why did HSBC buy SVB UK?

This is because HSBC’s CEO Noel Quinn was reportedly attracted by the potential to bring some 3,000 high-growth technology and startup clients all at once.

ALSO WATCH | HSBC acquires the UK arm of Silicon Valley Bank | WION Dispatch

The purely nominal purchase price and SVB UK’s underlying health meant the deal also made financial sense, Reuters reported while citing a source. 

The biggest losers from SVB’s collapse

Sweden’s biggest pension fund, Alecta, is set to lose as much as $1.1 billion on bets it had made. However, according to Eurogroup President Paschal Donohoe, the euro zone has “limited exposure” to the fallout from the SVB’s collapse — and thereby will be able to manage the risks such as the current SVB crisis. 

Shockwaves from the collapse of Silicon Valley Bank have further pounded global bank stocks on Tuesday. The assurances from the US President Joe Biden and other policymakers have reportedly done little to calm the markets down and have prompted a rethink on the interest rate outlook.

Biden’s efforts to reassure markets and depositors came after emergency U.S. measures to shore up banks by giving them access to additional funding failed to dispel investor worries about potential contagion to other lenders worldwide.

About Silicon Valley Bank’s Collapse

Silicon Valley Bank was founded in 1983 in Santa Clara, California. It soon emerged as a financial institution of choice for an elevating tech sector.

As of 2021, the bank said that it was the primary financial institution for half all US venture-backed startups and pitched itself as “financial partner of the innovation economy.” All that basically means that it has been knitted into the financial infrastructure of the tech industry, especially the startups.

Silicon Valley Bank’s collapse reportedly began in the second week of March. The bank takes deposits from clients and invests them in generally safe securities, such as the bonds. As the Federal Reserve has increased interest rates, those bonds have become worth less.

On Wednesday, March 8, SVB’s parent company, SVB Financial Group, said it would undertake a $2.25 billion share sale after selling $21 billion of securities from its portfolio at a nearly $2 billion loss. The move was meant to shore up its balance sheet. Instead, it spooked markets and clients, finally leading to its collapse.

(With inputs from agencies)

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