Why did Silicon Valley Bank go bust? Here’s what we can learn

20/04/2023

As you have likely read in the news over the past month, a small number of banks have collapsed in the US and Europe. Perhaps the most notable was Silicon Valley Bank (SVB), the US’s 16th largest bank.

After this, New York-based institution Signature Bank followed suit on 13 March.

Then, in Europe, Credit Suisse was bought by UBS Group AG for 3 billion CHF (around $3 billion), despite billions in bailouts from the European Central Bank (ECB), Reuters reports.

Reading these headlines, you might have many urgent questions. When multiple banks enter insolvency at once, it can spark understandable concerns – so if you’re wondering what on earth happened, and whether these collapses will affect your finances, you’re in the right place.

Read on to discover some key takeaways from the collapse of SVB and other large banks, and what you can do if you’re concerned about your capital in this time of volatility.

2 takeaways from Silicon Valley Bank’s liquidation

With so much media noise around the SVB collapse, let’s focus on two key takeaways investors should remember.

1. SVB’s liquidation ultimately came down to a series of unhedged ventures that didn’t pay off

In simple terms, SVB’s collapse came after the bank relied on fixed-interest asset payments that couldn’t keep up with rising interest rates.

Since March 2020, the bank had been buying up “low-risk” government-backed mortgage bonds and US Treasury bonds, supposedly shoring itself up against the continued volatility seen by markets.

Nevertheless, the bank was in risky territory as it struggled against rising interest rates. –

Bonds tend to reduce in value when interest rates rise, as they have done significantly in recent months. So, as the US Federal Reserve increased rates in an attempt to slow inflation, the bonds SVB had been buying up began to diminish in value. To meet withdrawal requests, they had to sell many of these bonds at a loss.

Unfortunately, this dip in bond value was combined with the rising cost of living in the US, prompting customers to withdraw larger amounts than usual. This lethal combination meant that, on 8 March, SVB announced it needed $1.75 billion to cover the influx of deposit withdrawal requests.

Understandably, SVB’s worried customers then withdrew $42 billion in deposits by the end of the day on 9 March, CNBC reports – prompting regulators to step in and close the bank altogether.

So, while understandably concerning, it’s likely SVB’s downfall came from poor internal risk management, as opposed to being caused by a widespread national or international banking issue.

2. The SVB collapse caused a swathe of withdrawals from customers at other banks, causing another US institution to enter liquidation

Although SVB collapsing was seemingly an isolated incident, it did prompt a swathe of withdrawals from account holders with other banks – some of which led to further closures.

As you read earlier, Signature Bank went into insolvency just three days after SVB. According to CNBC, customers spooked by the SVB collapse withdrew $10 billion in deposits on Friday 10 March – the same day SVB was closed by regulators.

The report goes on to say that this led to “the third-largest bank failure in US history”, and that “Signature Bank was being taken over to protect its depositors and the stability of the US financial system”.

Fortunately, between 10 March and 11 April 2023, no more US banks have entered liquidation. It seems that, although many US bank customers are perturbed by the collapses, the situation has stabilised for the time being.

As for Credit Suisse, which had seen multiple management changes, scandals including bribery fines, and strategy shifts in the past few years, it seems this was an isolated collapse that, despite efforts from the ECB, could not be stopped.

So, if you do hold accounts with US or European banks, it could be wise to stay put and take heed of the fact that although these bank closures were somewhat worrying, it looks as if there’s no need to panic.

The key difference between the recent bank collapses and the 2008 financial crash

As you can imagine, the collapse of multiple banks has raised alarm bells, with some comparing these events with the 2008 financial crash.

If you have seen headlines of this nature, you could be feeling very concerned. Following the economic volatility caused by the Covid-19 pandemic, a further widespread financial event could be a huge challenge for the US and UK to face.

Fortunately, although the comparisons between the two events are understandable, there is a key difference between recent bank collapses and the 2008 financial crisis. While 2008 was a direct result of deregulation that had happened in the late 1990s, US banking is now once again more regulated – although less tightly than it was in the mid and late 20th century.

Indeed, due to the package of restrictions put in place by the Obama administration following 2008, the SVB and Signature collapses were not as contagious as they might have been if banks were left unregulated.

This being said, there are lessons to be learned here. If the Fed continues to raise interest rates throughout 2023, the consequences for smaller banks could be similar to those of SVB and Signature.

On this note, former governor of the Bank of England (BoE), Mark Carney, has called for a “rethink” of the rules brought in after 2008, claiming they should reflect how quickly cash can exit a lender in the digital age, Reuters reveals.

So, although it is unlikely there will be a repeat of the 2008 financial crisis, it may be that banks require tighter regulations to avoid further liquidation events like the ones seen in March 2023.

If you’re concerned about the security of your finances at the moment, speak to us

These events, combined with the market volatility witnessed by markets since the start of the pandemic, might be concerning to you.

Even though it seems waters are calming since the bank collapses of March 2023, you could be tempted to make significant withdrawals if you’re concerned about more financial institutions going bust.

At this stage, it is important to remember that the Financial Services Compensation Service (FSCS) usually protects deposits of up to £85,000, or £170,000 in a joint account, if your bank fails.

If you are still feeling unsure about your deposits and plan to make a large withdrawal as a result, it is important to discuss your decision with a trusted financial planner first. Our expertise can help you make sense of ongoing financial events, and allow you to take a breath before making any rash decisions.

We can look at the history of the markets, explain the regulations in place, and allow you to make an informed choice about your wealth.

Get in touch

If you have questions about the SVB collapse, or how further events could affect your financial stability, contact us. Email info@depledgeswm.com or call 0161 8080200.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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.