SILICON VALLEY BANK has triggered a panic in the banking sector and the Department of Finance said it is “monitoring developments” at the collapsed bank.
However, the Department of Finance added that there is “limited direct impact on the Irish financial system”.
In the United States, Joe Biden has vowed to hold “fully accountable” the people responsible for “this mess” while the UK arm of SVB has been sold to HSBC for a nominal £1 in a rescue deal.
So what is Silicon Valley Bank and why has it collapsed?
Silicon Valley Bank (SVB) is based in Santa Clara, California and caters to the tech industry and the venture capital funds which invest in startups.
Little known to the general public prior to last week, SVB specialised in financing startups and had become the 16th largest US bank by assets.
At the end of 2022, it had $209 billion in assets and approximately $175.4 billion in deposits.
Present in the United States, Europe, Asia and Israel, the bank offered a range of financial services to startups, from simple bank accounts to advisory services on how to attract investments, as well as private banking and wealth management.
SVB boasts on its website that around half of all US venture capital-backed tech and life sciences companies are its clients, including Pinterest and Shopify.
The parent company of the commercial bank, SVB Financial Group, announced last Wednesday that it would try to raise $2.5 billion in fresh funds through a share offering, after having sold off $21 billion in securities at a loss of $1.8 billion.
The bank was trying to raise funds to confront a surge in withdrawals by clients.
According to sources to Bloomberg, investment funds were advising their clients to withdraw their funds from SVB, worsening the situation for the bank.
SVB chief executive Greg Becker sought to reassure customers about the bank’s financial health on Thursday, The Wall Street Journal reported, citing people familiar with the matter.
The newspaper said Becker urged them against pulling their deposits from the bank and to not spread fear or panic about its situation.
Trading in the bank’s shares were suspended on Friday after having fallen 60% on Thursday.
Irish tech entrepreneur Pat Phelan, co-founder and CEO of Sisu Clinic, told RTÉ’s This Week programme: “I started looking at their [SVB] stock price, and it started dropping quickly and by Wednesday was in freefall, Thursday it was down 60%.”
Phelan said he had a lot of money on deposit in SVB because “we’re a venture-backed startup and the venture capitalists like you to use SVB”.
However, Phelan said he pulled “millions” from the bank on Thursday night.
SVB’s focus on the tech industry made it vulnerable to the deteriorating conditions for the sector.
The sharp increase in interest rates and a weakening risk appetite among investors plus continued supply chain problems.
After more than a decade of relentless growth, the stock market capitalisation of tech companies tumbled last year and they announced tens of thousands of layoffs.
Ireland has been affected by these jobs losses, which have hit tech giants like Meta, PayPal, Microsoft, Twitter and others.
Banks have also been impacted by the increase in interest rates.
While higher interest rates are generally good for banks as they can earn more from lending, a lot depends on the rate they have to pay to acquire funds.
Short-term interest rates are currently higher than long-term interest rates in the United States, squeezing weaker banks and complicating investments.
Regulators on Friday took control of SVB after a huge run on deposits left the medium-sized bank unable to stay afloat on its own.
US and European authorities have moved to ease fears over the health of the banking system following the failure of Silicon Valley Bank, as US regulators took over a second troubled lender.
US federal authorities stepped in to ensure depositors still had access to their funds at SVB and promised other institutions help in meeting customers’ needs, but markets remained on edge today following the bank’s sudden collapse.
In Britain, banking giant HSBC bought SVB’s UK division for just £1 ($1.2) in a rescue deal overseen by the Bank of England and the government, while French and German authorities said there were no risks to their financial systems.
Amid fears over the wider sector, US President Joe Biden vowed to hold “fully accountable” the people responsible for “this mess” and said he would deliver remarks on today on maintaining a resilient banking system.
In a joint statement yesterday, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Treasury Department said SVB depositors would have access to “all of their money” starting today and that American taxpayers will not have to foot the bill.
The British government’s SVB UK rescue deal also guarantees deposits of customers, which includes major businesses in the technology and life science sectors.
“This (deal) ensures customer deposits are protected and can bank as normal, with no taxpayer support,” said British finance minister Jeremy Hunt, who had warned a day earlier that SVB’s collapse posed a serious risk to the UK’s tech sector.
Hours before Sunday’s joint statement, Treasury Secretary Janet Yellen told CBS that the US government wanted “to make sure that the troubles that exist at one bank don’t create contagion to others that are sound.”
Since Friday, there have been calls from the tech and finance sectors for a bailout, which Yellen ruled out.
Yellen said reforms made after the 2008 financial crisis meant the government was not considering this option for SVB.
However, concern remains for other banks in the US.
State regulators closed New York-based Signature Bank on Sunday and First Republic, based in San Francisco, is down over 50% in pre-market trading.
*FIRST REPUBLIC BANK FALLS 60% IN PREMARKET TRADINGhttps://t.co/XXsIEJV8z6 pic.twitter.com/8e9BZ4XdBu
— Joe Weisenthal (@TheStalwart) March 13, 2023
Elsewhere, Germany’s finance watchdog said the “distressed situation” of SVB’s German branch “does not pose a threat to financial stability”.
The regulator, Bafin, added it had ordered “a moratorium” on the bank’s German unit which it said did not offer bank deposit services.
French Finance Minister Bruno Le Maire said no “special warning” was needed for local lenders.
“I don’t see any risk of contagion,” he told Franceinfo radio.
Despite the moves, European stock markets fell deeper into the red on Monday and most Asian indices finished lower, with banks taking a hit.
“The contagion risk remains for small banks with highly rate-sensitive clients but the US authorities now step in to avoid contagion,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
“The bank crisis will be sitting in the headlines, as solutions and possible contagion beyond the banking sector and beyond the US borders will be on the menu of the week,” she said.
The Department of Finance said it is “monitoring developments regarding the collapse of Silicon Valley Bank”.
While the Department said there is “limited direct impact on the Irish financial system”, a statement from the Department notes that “Silicon Valley Bank was a lender to some Irish companies since 2012”.
The statement added: “The Department will monitor the progress of the Federal Deposit Insurance Corporation (FDIC), the US Government agency that guarantees bank deposits, in its sale of SVB and what impact that may have on domestic companies impacted by this failure.”
On Saturday, the Ireland Strategic Investment Fund (ISIF) said the around $100m it had invested in five funds managed by SVB Capital, a subsidiary of the Silicon Valley Bank (SVB) Financial Group, would not be impacted.
“ISIF does not expect any impact on these investments arising from SVB Financial Group’s announcement that it will issue additional shares in the group,” a spokesperson for ISIF told RTÉ.
A statement from ISIF added: “The distributions received by ISIF from these investments since 2012 exceed the amount currently invested.
“ISIF has structured these investments in a manner that legally ring-fences them from the rest of the SVB Financial Group.”
Pat Phelan, co-founder and CEO of Sisu Clinic, told RTÉ yesterday that he pulled money out of SVB on Thursday night.
However, Phelan said he had been getting calls from people in Irish companies that left money in the now collapsed bank.
“I was talking to one person in particular, who runs a very successful Irish company, and has $8 million that they have no access to today,” he told RTÉ’s This Week programme.
-With additional reporting from Diarmuid Pepper
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