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From Silvergate to Silicone Valley Bank – what went wrong?

From Silvergate to Silicone Valley Bank – what went wrong?

Last week, after Payments Cards & Mobile reported on the failure of Silvergate Bank, an even bigger failure began to unfold for Silicon Valley Bank.

Silicon Valley Bank – what went wrong?

On the 9th March shares plunged 60% in Silicon Valley Bank (SVB), a day after launching a $2.25 billion stock sale to shore up its balance sheet, as it grappled with declining deposits from technology start-ups.

Shares of SVB Financial Group, it’s parent company, registered their biggest decline on record, wiping $9.6 billion from the banking group’s market capitalisation, after it admitted large losses on the sale of securities as it attempted to raise cash.

The contagion went on from there, ripping through the parent company and into the UK and German arms of the bank – not to mention the disruption to hundreds of tech companies who have their funds caught up.

The collapse of the $209 billion-in-assets lender marks the second-largest bank failure in US history after the 2008 shuttering of Washington Mutual.

The bank’s failure has sent shockwaves through Silicon Valley, where it’s a big lender to many of the largest venture capital firms and their portfolio companies.

The lender’s troubles stem from a misfired bet on interest rates made at the height of the tech boom, as the FT reported in detail last month.

What went wrong

SVB’s tech start-up clients, flush with funding from venture capitalists during the speculative coronavirus tech boom, were inundating the bank with cash.

Unable to give loans at the same speed, SVB decided to put a staggering $91 billion in deposits somewhere else: long-dated securities such as mortgage bonds and US Treasuries.

Here’s why that’s bad: It gave SVB a double sensitivity to higher interest rates.

On the asset side of the balance sheet, higher rates decrease the value of those long-term debt securities. On the liability side, higher rates mean less money shoved at tech, and as such, a lower supply of cheap deposit funding.

In addition, SVB’s bond portfolio plummeted by $15 billion in value . . . nearly as much as the bank’s tier 1 common equity.

Making things worse, the subsequent share sale, meant to shore up the bank’s balance sheet, frankly, blew up.

The fall out

US banking regulators took over SVB on 10th March, after a rush of deposit outflows and a plunge in its stock price pushed the bank past the brink.

The bank had abandoned its efforts to raise $2.25 billion in new funding to cover losses on its bond portfolio earlier in the day and had been looking for a buyer to save it.

SVB shares were halted during early trading on New York’s Nasdaq exchange, as its management tried to reassure investors.

HSBC has also helped avert a crisis in the UK’s tech sector by rescuing SVB’s UK arm, a fire sale sealed after all-night talks led by Prime Minister Rishi Sunak and the Bank of England.

The deal, which will see HSBC pay a symbolic £1 for SVB UK, avoids the UK government having to step in to protect depositors.

Finally, the German financial watchdog BaFin imposed a moratorium over the German branch of Silicon Valley Bank, temporarily blocking any payments to and from clients.

The banking regulator stressed that the German branch of the defunct US lender had no systemic importance for the stability of the country’s financial system.

 

The post From Silvergate to Silicon Valley Bank – what went wrong? appeared first on Payments Cards & Mobile.

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