Today we picked up what may be one of the most relevant news in the financial world in years: the collapse of Silicon Valley Bank. The Californian bank, the most important in Silicon Valley, collapsed a few days ago after an aggressive interest rate hike by the US Federal Reserve caused panic among its customers, who withdrew their funds en masse and forced the bank to sell bonds at a loss.
A subject that has raised many more questions than answers, and of which many people will not be aware given its complexity. To answer some of these questions, below we explain some of the most important aspects of an event that has only just begun.
What is Silicon Valley Bank and what is the extent of the damage?
To begin with, Silicon Valley Bank is a bank whose main clients belonged to the technology or biotechnology sector. These companies generally need strong financial backing, including lines of credit and venture debt. According to the bank, 44% of the U.S. venture capital-backed companies that had gone public were its clients, so it would affect a very large number of both companies and individuals.
Unlike other U.S. banks, the vast majority of Silicon Valley Bank’s deposits (88%) exceeded $250,000 insured. At the moment, it is unknown whether the accounts that exceed this amount and have not yet withdrawn their money will recover the funds, as well as the percentage that they will recover of the amount exceeding $250,000.
Even so, many accounts were still insured for deposits in excess of this amount, having deposits in different categories of legal ownership, so that many customers would be assured of getting their money back. This would therefore represent a huge capital gap in the event of a bank failure, as has finally happened.
For now, it is difficult to know with certainty the real extent of the damage in the biotechnology sector. Although the companies listed on the stock exchange will have to confirm their situation in the next few days due to legal issues and will even make press releases to remove any suspicion of a link with the incident, the real situation of this industry will remain unknown until several years have passed.
Why was it so important, and what happened to cause it to collapse?
The bank, known for its venture capital investments, grew enormously in recent years due to the rise and development of the biotech sector, which needed more and more capital over the years. Similar to the 2008 financial crisis (conceptually very different), Silicon Valley Bank was lending to “almost anyone” and at a very low cost, boosted by the injection of liquidity from central banks after the COVID-19 crisis.
In recent years, the bank bought U.S. Treasury bonds at virtually zero interest. After the recent interest rate hike by the Federal Reserve, its investment portfolio was greatly devalued, and when forced to sell these bonds, Silicon Valley Bank faced huge losses.
The situation is very complex, but what is clear is that this huge problem will affect everyone, at the very least, because of the impact it will have on technological development, since, from now on, funding for innovation will be much scarcer, and there will be fewer and fewer new ideas, as there will be no capital with which to carry them out.