Regulators Step In as Silicon Valley Bank’s Troubles Increase, Sparking Concerns

Regulators Step In as Silicon Valley Bank's Troubles Increase, Sparking Concerns

Regulators have closed Silicon Valley Bank (SVB) and taken possession of customer deposits, making it the most substantial US bank failure since 2008. The bank had been attempting to raise funds in order to cover losses due to rising interest rates. Customers started to withdraw their funds, causing more alarm about the banking industry. The Federal Deposit Insurance Corporation (FDIC) declared the bank

insolvent and took control of its deposits, which totaled about $175bn. The FDIC protected deposits up to $250,000. Officials stated that this move was made to “protect insured depositors” .Many companies with funds at the bank are concerned due to the large number of their customers facing investor flight. A start-up founder recently voiced their anxiety to the BBC, saying, “I’m heading to the bank now to try and access my money; I attempted to transfer it out yesterday but was unsuccessful. It’s one of those moments where you feel like you could be in trouble, but you’re not sure.” A healthcare start-up founder reported that they had recently reached one million dollars in their bank account, only to face the looming prospect of not being able to make the transfer before the cutoff. He was able to wire the funds 40 minutes prior and was surprised to find it pending but then present the next morning. Describing the situation as “crazy”, he expressed awareness that others had been unable to make the transfer in time. The US Treasury Secretary has voiced her ‘full confidence’ in regulators’ response to the drastic drop in shares of Silicon Valley Bank (SVB) caused by its attempts to raise capital, as well as the wider impact of the slump on banking shares globally .Janet Yellen, speaking in Washington, noted that the banking system remains resilient, despite the dramatic fall in SVB shares on Thursday which saw their biggest one-day drop on record. To cover a loss resulting from the sale of assets, primarily US government bonds, the bank had been trying to collect $2.25 billion (£1.9 billion). The news caused investors and customers to flee the bank, resulting in a further drop in share prices during after-hours trading before trading was halted. These concerns triggered a wider sell-off of banking shares across the world on Thursday and Friday, with Yellen expressing her ‘full confidence’ in the capabilities of regulators to respond effectively. Silicon Valley Bank (SVB), a critical lender for early-stage businesses, is the banking partner for almost half of US venture-backed technology and healthcare companies that listed on stock markets last year. The firm, which originated in California in 1983, has seen a dramatic growth in its operations globally, with over 8,500 personnel, primarily in the US. However, with the current rise in interest rates, start-ups have been feeling the pinch when it comes to raising capital through private fundraising or share sales.

In addition, withdrawals from customers have compounded the situation, leading to the collapse this week. The aftermath of the bankruptcy has had a huge impact on Silicon Valley, with numerous companies inquiring about the potential implications for their finances. Despite multiple requests, SVB has yet to provide any comment. Silicon Valley Bank UK (SVBUK) has announced that it will be entering insolvency beginning Sunday evening. The Bank of England stated that during the interim, SVBUK will be unable to make payments or accept deposits, but the move will allow individual depositors to receive up to £85,000 from the UK’s deposit insurance scheme. Additionally, the BoE noted that SVBUK has only a minimal presence in the UK and no essential functions to the financial system. The potential risk to banks due to rapid increases in interest rates has caused alarm in the tech industry as the collapse of SVB has demonstrated. This has prompted central banks like the US Federal Reserve and the Bank of England to raise borrowing costs in an effort to limit inflation. However, such hikes in rates can cause existing bond portfolios to devalue. Although such losses are not typically an issue unless other pressures compel banks to sell their holdings, the drop in value of these investments has been a major cause of the stock market decline this week, particularly for smaller firms including Signature Bank and others, which have had their trading halted. Despite the ongoing market downturn, some major US banks have seen shares recover on Friday. The tech-based Nasdaq closed the day 1.7% lower, while the S&P 500 and Dow dropped 1.4% and 1%, respectively. Additionally, major European and Asian indexes also closed lower, with the FTSE 100 down 1.6%. Alexander Yokum an equity research analyst at CFRA, commented on the situation saying, “banks that specialise in single industries are seen as vulnerable to rapid withdrawals, like the one that hit SVB. Silicon Valley Bank would not have lost money if they hadn’t run out of cash to give back to their customers – the issue was that people wanted money and they didn’t have it, they had it invested and those investments were down. “Yokum further added, “I know there’s a lot of fear, but it’s definitely company-specific. The average Joe should be fine, however, tech firms would likely find it even harder to raise money. It’s not good.”

kabir khan

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