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The Market Fallout from Silicon Valley Bank

Published on March 28, 2023 by Luis Melendez and Mary Fernandez

Silicon Valley bank was founded in 1983 and is the 16th largest bank in the US. SVB provides loans to start-ups or venture capital and private equity firms that invest in start-ups. When start-ups earn money, they maintain a current account with SVB. Almost 50% of start-ups in the U.S have some connection with SVB. Forbes’ 14th February 2023 edition listed Silicon Valley Bank at 20th position of “American Best Banks”, however how the 209-billion-dollar bank with a record of being 20th for about 5 years collapsed is what we will look at.

In March 2020, during the pandemic the Federal government announced that interest rates will remain low to boost the economy. At this time, SVB saw their deposits triple from 61 billion in 2019 to 189 billion by the end of 2021 and used the inflow to invest into long-term mortgage-backed securities and bonds. KMPG audited the statements of the company and reported a stable environment for 2022.

Owing to inflation, the Federal Reserve increased interest rates in November 2022 and investments at the bank started to plunge. To counter this, many customers at SVB started pulling out their money to meet liquidity needs. The bank began selling their high yield bonds at much lower rates which caused a loss of $1.8 billion to fund withdrawals. Vox Media and other start-ups were struggling to meet payrolls. On March 9th, 2023, the stocks of SVB fell close to 69%, the fall in stock not only impacted SVB but also led to a drop of $52 billion in market value of four banks combined - J.P Morgan, Bank of America, Wells Fargo, and Citigroup. By the end of the day depositors at the bank attempted to withdraw close to $42 billion. The deposits were not able to be liquidated since these were linked to long-term investments. 48 hours after the sale of assets, the bank plummeted into collapse. Venture capital firms and asset managers advised portfolio companies and companies to shift their funds from the bank. Many companies that used Silicon Valley Bank as a custodian were now conducting due diligence for an alternative.

The following day, the Federal Deposit Insurance Corporation (FDIC), an independent regulatory agency that upholds public confidence in the nation’s financial system stepped in and took control of the bank’s operations and announced that all depositors would be protected. The accounts within SVB were insured for an amount up to $250,000. However, a total of 150 million was uninsured. A crucial factor to bring up for analysis is the fact that SVB stockholders and investors were not backed by the FDIC on their investments. US government actions towards SVB are clear and concise. All the deposits were transferred to the National Bank of Santa Clara to consolidate and ensure coverage of every single deposit, however, the status of SVB will remain as collapsed and assets going to creditors. Always having the option of a buyer stepping up to purchase and reconstruct the institution entirely.

This has caused a ripple effect across European and Asian banks and has brought negative effects. Bank shares were cascading down upon reopening markets since the SVB crisis. Regulators are suggesting the strengthening of US controls against the EU which are much more stringent and robust in terms of regulation for smaller banks. Regional banks were noticing a drop in their valuations while unfortunate others collapsed. The U.K government on one hand was trying to lessen the impacts of the crash while the economy was contemplating on the magnitude of the impact.

By the end of March 2023, there would be an increase of 50 basis points on the next Federal rate setting meeting and the SVB situation may have a direct impact on this scenario. Creating an environment of constraint and restriction towards an increase by having the main target of bringing inflation back to normal numbers.

Investors worldwide are starting to pay more attention to the concentration and insurance of deposits, specially within the tech sector and have expressed their high level of comfort towards the immediate response and efficiency of regulators to contain and develop a plan to tackle the crisis currently ongoing, but at the same time, the increase of doubts and lack of confidence in the system, are exposing severe defects driven by the exponential rise in long term interest rates.

The SVB collapse has caused a ripple effect on other banks and institutions such as Signature Bank, Fidelity, First Republic, and Credit Suisse. The impacts have been three-fold and replicates the Washington Mutual event in 2008. One of the major negative impacts driven by this financial collapse, will be the difficulty for small and medium sized banks to borrow in wholesale markets. Awareness of a larger counter-party risk is something to consider for future actions.

How Acuity Knowledge Partners can help

Acuity Knowledge Partners is an influential player in the global market, offering compliance expertise and a wide array of other services. We enable our compliance clients to manage increasing demands on their teams by providing customized managed services solutions, based on specialized skills and technology, and by delivering operational efficiency, resilience, and significant cost savings. We believe our offering is even more relevant in the post-COVID-19 economic and operating environment, where compliance teams have seen a significant increase in workload in tasks such as trade surveillancecommunications surveillancedistribution compliance, virtual client on-boarding and transaction monitoring. We provide details of our compliance offerings here https://www.acuitykp.com/solutions/central-compliance.

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About the Authors

Luis Melendez is a Delivery Lead and has been associated with Acuity Knowledge Partners for one year. At Acuity Knowledge Partners, he is part of the corporate and forensic compliance team and is part of the operational due diligence team for a client. He is a graduate who specialized in Criminology and Financial Crimes, from the ULICORI University at Costa Rica.

Mary Ann Fernandez is a Senior Associate and has been associated with Acuity Knowledge Partners for four years. At Acuity Knowledge Partners she is part of the corporate and forensic compliance team and is part of the operational due diligence team for a client. She is a graduate who specialized in Finance and Accounting and holds a Bachelors degree from Christ University, Bangalore.

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