There’s a good chance you’ve seen headlines in recent weeks describing the collapse of a commercial bank in the US. Due to several varied factors, Silicon Valley Bank (SVB) failed on Friday 10 March, leaving many of its clients immediately unable to access their capital.
Thankfully, it seems as though the collapse isn’t a precursor to another 2008-esque financial crash, as reforms put in place since the collapse of Lehman Brothers have helped to avoid contagion in the sector.
Though, when a large financial institution falls, this will likely have ripple effects on the broader economy. So, continue reading to find out why exactly the bank collapsed, and how it could affect your finances here in the UK.
Silicon Valley Bank collapsed due to a number of different factors
As you may have seen, SVB, a state-chartered commercial bank headquartered in California, collapsed on Friday 10 March. Several factors reportedly caused the unfortunate event.
Indeed, according to the Guardian, experts argue a combination of Trump-era regulation rollbacks, poor risk management at the bank, and a sharp rise to interest rates after a decade of low borrowing costs were to blame.
The bank reportedly invested heavily in typically “safe” US government bonds. Though, the price of bonds tends to move inversely with interest rates: when rates rise, bond prices typically fall.
So, when the Federal Reserve increased interest rates in an attempt to combat rising inflation, SVB’s bond holdings started to fall in value significantly. If SVB kept these bonds until their maturity date, it potentially would’ve earned a return on its capital.
However, amid high living costs, many deposit holders started to withdraw increasing amounts of money, and on 8 March, the investment bank announced that it needed to raise $1.75 billion to cover these requests.
Then, when the bank’s customers learned that SVB was in financial hot water, customers withdrew $42 billion of deposits by the end of 9 March. As a result, the bank had a negative cash balance of $958 million, authorities froze withdrawals, and the bank became insolvent.
SVB then went looking for a buyer, but to no avail – regulators seized the business at 9 am on Friday 10 March, making it the largest lender to fall since the 2008 financial crisis.
This has, understandably, sent shockwaves through banking sectors in the US and Europe.
Thankfully, the “systemic risk exception”, which allows the Federal Deposit Insurance Corporation to intervene in situations that present a risk to the stability of the entire financial system, meant the US government stepped in to guarantee all deposits.
In the UK, after more than 200 companies that were depositors with SVB wrote to the Treasury asking for help, HSBC bought the UK arm of the bank for £1, a deal that protected around £6.7 billion in deposits.
Despite the worries you may have surrounding SVB’s collapse, Jeremy Hunt said the UK government was working to “recognise the anxiety” of businesses caught up in the crisis, but did not believe there was a “systemic contagion risk”.
As for the knock-on effects outside the US, European banking stocks dropped slightly soon after the collapse, although many have since stabilised.
Also, SVB was a significant player in venture debt, a type of loan designed specifically for early-stage, high-growth companies with venture capital backing. So, some startups that relied on the bank may be unable to access funds not already drawn, leaving them in an uncertain position.
How could this affect your finances?
Thankfully, in the UK, the Financial Services Compensation Scheme (FSCS) protects deposits held up to the value of £85,000 (£170,000 for a joint account) in the event that a financial institution fails.
If you’re still worried about the banking system and have more than £85,000 saved with one institution, it may be worth spreading this across several banks and building societies to ensure the FSCS scheme covers you.
As for the markets, the FTSE 100 fell from 7,748 on Friday 10 March, to 7,548 by Monday 13 March after the crash. Banks and financial companies also saw a slight dip – for example, the HSBC share price fell from £5.92 on Friday 10 March, to £5.42 a week later.
As you can see, there was an apparent immediate concern after the collapse, though markets have since stabilised. In fact, as of 12 April 2023, the FTSE 100 opened at 7,785, slightly above its pre-crash levels.
Get in touch
If you’re worried about how SVB’s collapse could affect your finances, we can help give you peace of mind.
Please contact us via email at info@investmentsense.co.uk or call 0115 933 8433 to find out more.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
