Following the Silicon Valley Bank (SVB) news, Signature Bank ($110.36 billion in assets) is one of the latest banks to close its doors. This is a result of its cryptocurrency deposits and a Run on Deposits. SVB is actually one of the biggest lenders and banks in the US economy, with a focus on working with emerging businesses. It's worth noting that their influence has had a significant impact not only on the start-up ecosystem but also on other lenders.
What is the big deal with Silicon Valley and the bank?
Silicon Valley is in Northern California and is known for leading in technology. It is currently the home to some leading tech companies and start-ups. With that being said, the Silicon Valley Bank (SVB) was one of the biggest lenders to start-ups in the area and the US. The bank is a subsidiary of SVB Financial Group that operates in 9 countries as well, which include the UK, China, Germany and Sweden!
According to its homepage, it banks nearly half of all US venture-backed start-ups and 44% of the US technology and healthcare start-ups that went public in 2022.
On Friday, the 10 February 2023, the Federal Deposit Insurance Corporation (FDIC) appointed the California Department of Financial Protection and Innovation to take over where it closed SVB, further announcing that the bank will reopen on Monday as Deposit Insurance National Bank of Santa Clara (DINB). Insured deposits (up to $250,000 per insured account) were transferred to the new bank; for the rest of the unsecured debt, the FDIC indicated that it aims to pay an advanced dividend by this week and that further payments will depend on how much the assets of SVB bank are sold for.
One of the reasons that led to the closures is the fact that the bank was heavily invested in short-term US bonds (valued at $21 billion). This led the bank to sell the securities at a loss of $1.8 billion. Since bonds are government debt instruments, higher interest rates = higher yield = lower bond prices. The sale of these securities is estimated to be around a $1.8 billion loss.
Because of this, various firms advised many of the clients of SVB to withdraw their funds. This led to more clients wanting to withdraw, and the bank not having enough money to pay the clients.
How does this affect investors in general?
The news led to the stock market being concerned about what it could mean for other banks. Unlike SVB, other American banks may be more diversified in assets and jurisdictions, considering the balance sheets.
By the end of 2022, it had over $200 billion in assets, which accounts for at least 0.90% of the overall banking assets value in the US, which means that there may be some institutions and start-ups affected because it announced that only insured funds (up to the standard limit) would be withdrawable and many of the accounts had more than that.
The UK government was working over the weekend, and it intends to minimise the impact on affected start-ups. It has noted that this will not bring risk to the UK financial system; Chancellor Jeremy Hunt told BBC that: “there is a serious risk to some of our most promising companies in technology and life sciences.
“These are very important companies to the UK, a very important part of our future... We want to find a way that minimises or avoids all losses to those incredibly promising [firms]”.
On the other hand, on Monday, HSBC agreed to buy the UK business (SVB UK) for £1.
The event will affect sentiments on start-ups and the financial sector in such an environment of rising rates; an important point that could determine the level of impact would also be how the different governments handle the situation - taking into account the performance and how the start-ups service their debt, during a period of rising rates.
Our Chief Investment Officer from Rise, Duane Gilbert, added that:
"This might impact the Fed's ability to raise interest rates aggressively and fight inflation - which is what they need to do. All banks, including SA banks, haven't been lending out the deposits that they receive as they are supposed to do because they don't want to take the risk. Instead, they have just been buying government bonds. We might find that other banks are also on the brink of collapse. If irresponsible banks take away the fed's tool to fight inflation, we could have a US inflation problem."
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Sources - EasyResearch, Financial Times, The Independent, BBC, FRED Economic Data