What Happened to Silicon Valley Bank?
2023 could provide the spark that will ignite the next global recession. The recent crumbling of Silicon Valley Bank, one of the biggest banks in the US was one that many feared would happen sooner or later. But what actually happened and what does it all mean? Read on to find out. After that, we’ll list the top fundamental events that you can trade this week. Let’s go!
Vanished overnight
You’d be forgiven for thinking that the second-largest bank collapse in US history couldn’t possibly happen overnight. Well, it actually did. Sort of.
SVB stock, YTD
Source: Google
Until March 9, Silicon Valley Bank was the 16th largest US bank. Its speciality was supporting technology companies worldwide, that’s all before a bunch of poor investment decisions led to implosion.
What actually happened to Silicon Valley Bank?
To answer that, we need to hop in our time machine, fire up the flux capacitor and whirl back to 2020. Following the initial covid panic, the markets were well-placed for startups to thrive — Zoom (ZM) anyone?
Essentially, people needed tech — a lot of it — and tech companies needed cash to expand in equal measure. Enter Silicon Valley Bank.
SVB invested heavily in US government bonds — usually some of the safest things on the planet. As cool as they are, bonds have one kryptonite — interest rates. When rates rise, bond prices fall. So when the Federal Reserve started to push rates up rapidly to combat inflation, SVB’s bond portfolio started to slump, in a really big-bad way.
As the market dipped over the last few months, SVB’s customers started needing their cash reserves. Quite simply, SVB didn’t have the cash to keep up with the withdrawals, so sold some of its bonds. Which freaked everyone out.
48 hours later — SVB was no more. What a difference two days makes!
What could this mean for the wider market?
Initially, everyone thought this might be it. The spark that ignites the next recession.
Fortunately for SVB customers, the US government intervened in the nick of time, guaranteeing all the deposits that SVB couldn’t pay back. That’s a big deal because we’re talking about successfully protecting a lot of tech startups — and thousands of jobs — all over the world. Phew!
HSBC bought the American bank’s British arm for 1 British pound in a deal facilitated by the Bank of England after its parent company collapsed in a social-media fueled bank run.
The biggest issue with this whole thing though is that it was all so easy. Interest rates are rising all over the world in order to tackle inflation. Speculation is a wondrous thing for investors, but when that speculation turns sour and people start panicking, terrible things can happen. And this event shows that it can happen just about anywhere.
The US Federal Reserve has now revealed a new program that will mean that banks can borrow funds backed by government securities to meet demands from deposit customers. However, it remains to be seen how effective this will be.
The icing on the cake
Get ready for the icing or the cherry on this cake. Silicon Valley Bank’s UK subsidiary gave $18 million + in bonuses last week — just days after HSBC swooped in to save the institution from insolvency.
Payouts to staff, which included senior executives, were given the green light earlier this week by HSBC, SVB UK’s new owner, Sky News reported.
Ummmm … right then.
Penny for your thoughts?
What did you make of this sorry saga? Were your investments affected by SVB closing? What do you think will happen next? Join the conversation by tweeting us at @_contentworks!
Top fundamental events week commencing 20.03.23
Here are all of the main events coming up in what looks like a pretty busy week for the markets.
Monday
No major events are scheduled.
Tuesday
● EUR — ZEW Economic Sentiment Index (MAR)
● CAD — Core Inflation Rate MoM (FEB); Core Inflation Rate YoY (FEB) Inflation Rate YoY (FEB)
Wednesday
● GBP — Core Inflation Rate YoY (FEB); Inflation Rate YoY (FEB)
● USD — FOMC Economic Projections; Fed Interest Rate Decision; Fed Press Conference
Thursday
● GBP — BoE Interest Rate Decision
Friday
● USD — Durable Goods Orders MoM (FEB)
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Speak soon!
The Contentworks team
