Metis AM
The news of the collapse of Silicon Valley Bank (SVB) in the US last month may have brought on flashbacks for many of the 2008 financial crisis.
While the SVB collapse happened for very different reasons than the crisis, it is significant. As well as occurring at a time when many are concerned that the US could be approaching a recession, the bank is the largest to collapse since the crisis in 2008.
Despite this, the SVB collapse is unlikely to cause lasting damage to the economy thanks to the measures that were put in place so swiftly by regulators. Read on to learn more about what happened to the bank and what it could mean for your investments over the coming weeks.
Silicon Valley Bank was the 16th largest US bank in 2022
A subsidiary of SVB Financial Group, SVB first opened in 1983 providing business banking services. They specialised in helping startups and venture-backed firms in the technology sector.
In 1998, the bank went public and by 2022 it was the 16th largest bank in the US, managing assets of around $209 billion.
Problems started when customers began to make large withdrawals
Since the pandemic began, SVB had been buying lots of what are often considered “safe” assets such as US Treasury bonds and government-backed mortgage bonds. When interest rates started to rise sharply, their fixed-interest payments didn’t keep up with rising rates.
Those assets were then no longer worth what SVB paid for them, and the bank was sitting on more than $17 billion in potential losses on those assets as of the end of 2022.
In early March, SVB faced a wave of $42 billion of deposit withdrawal requests. To raise enough cash to cover the outflows, SVB decided to sell some of its assets, but the sale came in at a loss of $1.8 billion.
When SVB’s stock price crashed, US regulators stepped in
The day after the announcement of the loss, Reuters reported that SVB Financial Group’s stock prices had fallen by 60%. This led even more of SVB’s customers to attempt to withdraw their money from the bank.
At this point, US regulators stepped in. On 10 March, they took over SVB and attempted to find a buyer for the bank.
HSBC bought the UK arm on 13 March for a symbolic £1. It meant that UK customers of SVB could be reassured that their money was safe.
However, in the US the regulators were unable to find a buyer. They announced emergency measures and the Federal Deposit Insurance Corporation (FDIC) took control of SVB’s assets to keep them safe for customers.
The Federal Reserve also authorised a new scheme called the Bank Term Funding Program (BTFP). The scheme will offer loans to credit unions and banks who find themselves unable to cover the cost of withdrawals to avoid them needing to sell assets quickly, as SVB did.
US customers will get their money back, but shareholders won’t be so lucky
Many of the companies who banked with SVB were at risk of collapsing themselves as a result of not having access to their money at this point.
To prevent this from happening, the Fed announced that the FDIC would compensate depositors for all of their money. FDIC usually only covers up to £250,000 for each institution that a customer banks with, but in this instance the limit has been waived.
Sadly, shareholders in SVB aren’t covered by this guarantee. It’s unlikely that they will be able to get their money back.
Investors may notice volatility in the coming weeks
Market volatility is expected following the events of the SVB collapse, particularly in the technology and banking sectors.
If you have shares in technology companies, you might have noticed their value drop in recent weeks. Remember that, over the long term, this shouldn’t have a large impact on your portfolio, but it may be something to consider if you were thinking of selling your shares any time soon.
In the banking sector, the collapse has led to some concern over the risk of contagion – the fear that the problems weren’t specific to SVB and that other banks could follow, particularly smaller banks. This has caused some people to withdraw their money from smaller banks and move it into larger, more established ones. This was one of the factors behind the collapse and subsequent sale of European bank Credit Suisse to Switzerland’s largest bank UBS.
As a result, the largest banks in the US, such as the Bank of America, have benefited, whereas otherwise healthy yet small banks might be put under pressure, at least in the short term.
In the UK, savings are protected up to £85,000 for each provider you use
You might be wondering what would happen here in the UK if a bank that you use fails like SVB did.
The Financial Services Compensation Scheme (FSCS) protects amounts up to £85,000 for each provider you use. So, if a bank that you use does collapse, you will get your money back up to that threshold.
Some corporations own multiple banks, so it’s important to distribute your wealth between providers and make sure you know who owns each provider to avoid getting caught out.
Additionally, if you have savings in any other countries, make sure you check how your deposits are insured, as different countries insure different amounts. In the EU, the bank deposit protection is €100,000 for each bank that you use.
Get in touch
As the SVB collapse has shown, it’s crucial that you know exactly where your money is invested and have a clear understanding of the health of the companies behind the shares you buy, as well as the protections that are in place should anything go wrong.
If you’d like help creating or rebalancing your portfolio to ensure it has the potential to help you achieve your goals, we can help. Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
