Silicon Valley Bank's Collapse Sends Shockwaves Through Global Markets

SVB Shut Down by Regulators in the United States

The regulatory authorities have taken control of customer deposits as the firm was struggling to raise funds to cover the losses caused by the sale of assets affected by higher interest rates. The bank's collapse has led to a rush of customer withdrawals, causing widespread panic and investor flight, and raising concerns about the state of the banking sector. The impact of SVB's collapse is particularly significant for the tech industry as the bank was a crucial lender for early-stage businesses, with the majority of US venture-backed technology and healthcare firms that listed on stock markets last year being its banking partners.

Banks Increase in Interest Rates and Hit Bond Markets

The collapse of SVB has far-reaching effects, and it remains to be seen how businesses, particularly those in the tech industry, will manage the fallout. Even businesses without a direct association with the bank were affected, like customers of Rippling, a firm that handles payrolls software and had used SVB. It warned that current payments might face delays and said it was switching its business to another bank. SVB's UK subsidiary will be put into insolvency from Sunday evening, and the Bank of England said Silicon Valley Bank UK would stop accepting deposits or making payments in the interim.

The collapse of SVB has raised concerns about the broader risks facing banks as rapid increases in interest rates hit bond markets. Central banks worldwide, including the US Federal Reserve and the Bank of England, have sharply raised borrowing costs over the last year to curb inflation. However, as rates rise, the value of existing bond portfolios typically declines. These declines mean many banks are sitting on significant potential losses, although the change in value would not typically be a problem unless other pressures force the firms to sell the holdings.

Regulatory Responses and Impact on Financial Markets

According to banking regulators in California, where the firm has its headquarters, Silicon Valley Bank faced "inadequate liquidity and insolvency. The bank was endeavoring to raise $2.25 billion to cover a loss brought about by the sale of assets, specifically US government bonds, that had been impacted by an increase in interest rates. Its troubles prompted a rush of customer withdrawals, causing widespread panic and investor flight. Global selling of bank shares was triggered by concerns that other banks might face comparable difficulties.

The Federal Deposit Insurance Corporation (FDIC) took charge of the roughly $175bn in deposits held at the bank to "protect insured depositors." The bank offices will reopen, and clients with insured deposits will have access to funds "no later than Monday morning." Money raised from selling the bank's assets will go to uninsured depositors. Janet Yellen, the US Treasury Secretary, conveyed her complete trust in the banking regulators to take the necessary measures in response.

On the day of the collapse, tech-heavy expert Nasdaq saw its biggest one-day drop since the start of the COVID-19 pandemic, ending the day down 1.7%. Smaller companies were also affected by the sell-off, leading to the suspension of trading for firms such as Signature Bank. The S&P 500 fell by 1.4%, and the Dow closed 1% lower as well. Major European and Asian indices also ended the day in the red, with a decline of 1.6% seen in the FTSE 100.

What Is the Impact on Global Markets?

Following the collapse of Silicon Valley Bank, banking stocks worldwide plummeted, with over £383bn wiped off their value. The Nikkei 225 dropped by 2.2pc, and the Topix index fell by 2.7pc, causing concerns over Japanese firms' exposure to US bonds. MUFG, Mizuho Financial Group, and Sumitomo Mitsui Financial Group were hit hard, with their shares plummeting. Japanese banks had increased their investment in foreign debt over the past decade, as domestic yields were impacted by Haruhiko Kuroda's aggressive monetary easing.

The Topix Banks index in Japan is experiencing its worst day since March 2020, declining by 7.4%. Mitsubishi UFJ Financial Group and Mizuho Financial Group both took a hit with losses of 8.66% and 7.1%, respectively, while the Topix index was down by 2.7%. Hong Kong's Hang Seng index has fallen by 2.35%, South Korea's KOSPI index by 2.4%, and Australia's S&P/ASX by 1.4%.