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The New Daily
World
Matthew Elmas

Explained: How Silicon Valley Bank collapsed, and what’s next

The collapse of two regional banks in the United States has sparked fears of wider financial turmoil. Photo: Getty

Monday saw a slide on Australian markets as the fallout from the collapse of California-based Silicon Valley Bank (SVB) reverberated across the world, sparking fears about a run on US deposits.

The bank failure, which began on Friday and is the second largest in US history, has thrown a cloud over billions of dollars worth of savings – some of which belong to Australian companies.

Fears that the financial contagion was spreading increased on Monday, when a second US regional bank, Signature, also collapsed.

But analysts said the woes are unlikely to unleash wider turmoil across Australia, particularly after the US government on Monday guaranteed both bank’s deposits, which is expected to calm US and global markets.

As bank stocks around the world plunged, US President Joe Biden said Monday his administration’s rapid actions  should reassure the public that the US banking system is safe, and promised stiffer bank regulation.

However, it is early days and analysts fear that other regional banks across the US could face renewed pressure to fund a wave of withdrawals – something that could have wider economic consequences.

So, how did we get here, and what’s likely to happen next?

‘Bleeding money’

The collapse of SVB occurred over the weekend, but has been months in the making.

The company has been under growing financial pressure from rapidly rising interest rates, which have squeezed its clients – about 90 per cent of which are tech firms or investors – and devalued its assets.

University of New South Wales associate professor Mark Humphery-Jenner explained that SVB had “incredibly concentrated” depositors across the relatively high-risk start-up and tech sector in California.

These firms have been “bleeding money” amid high inflation and rising rates, he said, and were thus drawing down on their savings with SVB to make ends meet, putting pressure on its balance sheet.

“All of their eggs were in one basket,” Dr Humphery-Jenner said.

The bank began liquidating its long-term assets – namely US Treasury bonds – to alleviate this worsening financial situation. But these bonds had lost about $1.8 billion in value due to higher interest rates, meaning SVB was unable to generate enough capital to meet deposit needs.

“The assets were worth significantly less, creating a solvency problem,” Dr Humphery-Jenner said. “It was the straw that broke the camel’s back.”

The bank did attempt to raise $2.5 billion in fresh capital last week in a last-ditch move to save itself but this backfired, sparking a wider loss in confidence among its tech company depositors, University of Technology of Sydney banking expert Thomas Matthys said.

“That’s when rumours started to spread, resulting in the bank run,” Dr Matthys said.

When it became clear the bank couldn’t make good on the deposits it held, the US government stepped in and took over the company.

Emergency measures

After taking over the bank last week, officials in the US have announced emergency steps to stop the losses at SVB, and protect the billions of dollars worth of deposits.

At first, regulators tried to sell the bank to another company that could fund its deposits, but when this failed they decided more extreme steps were needed to bolster market confidence.

The biggest of those moves was unveiled on Monday when the US Treasury, Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) guaranteed all of the bank’s deposits.

The extraordinary step is designed to bolster confidence so that the collapse of SVB remains isolated and doesn’t spark a broader run on US deposits that could wreak financial havoc.

“We are taking decisive actions to protect the US economy by strengthening public confidence in our banking system,” US officials said on Monday (Australian time).

“No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”

Dr Matthys says regulators didn’t “really have an alternative” to guaranteeing deposits, because if nothing was done a wave of customers at other banks could have begun withdrawing funds.

“Regional banks [in the US] would have been disproportionately affected,” he said.

What’s next?

Dr Humphery-Jenner said the guaranteeing of deposits should provide a backstop against a wider loss in confidence in the US banking system.

That should help the US and other economies avoid another global financial crisis like 2008.

And while local tech companies like Canva will be nervous about money they had banked with SVB, experts said the collapse doesn’t present any major risk to Australia’s banking system.

That’s because SVB was a relatively small bank against the scale of the US economy, let alone the broader global financial system, and because its client base was relatively specialised.

“The overall risk of a loss in confidence across the financial system seems pretty low,” Dr Humphery-Jenner said.

There is a larger risk for other regional banks in the US though, Dr Matthys said, because many of these companies have specialised depositors who may be feeling very nervous.

Shares in these companies have plummeted in the US over the past week, while another regional bank called Signature was also shut down by regulators on Monday morning.

Uncertainty about how this will play out is the big reason markets across the world struggled on Monday, with the impact of the collapses yet to be fully digested by analysts and investors.

“It’s still early days. We will have to see how US markets and depositors react to the news [from US regulators],’ he said.

“We won’t want to see any panic with US depositors.

“Having said that, SVB bank was quite unique in its approach. It was catering to a very niche and high-risk sector.”

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