Financial markets across the world have plummeted in the wake of the Silicon Valley Bank collapse despite central banks’ attempts to quell fears of a repeat of the 2008 banking crisis.
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Amid a global rout in stocks, European banks shed as much as 6% in this morning’s trading, putting them on track for their worst two-day drop since the Ukraine war began.
Fears of a potential global contagion appear to be receding thanks to swift action from financial authorities on both sides of the Atlantic over the weekend, but many predict the impact on the tech sector may be felt for years to come.
What is SVB and why did it collapse?
Founded in 1983 in California, Silicon Valley Bank (SVB) became the go-to bank for tech start-ups and claimed to have provided financing for almost half of US venture-backed technology and healthcare companies in 2021.
Yet despite being among the top 20 American commercial banks, with $209bn in total assets at the end of last year, it collapsed last week in a matter of hours.
In short, “SVB encountered a classic run on the bank”, said CNN Business, although “the longer version is a bit more complicated”, with several forces colliding to take it down.
Higher interest rates introduced over the past year by central banks around the world, including the US Federal Reserve, led to higher borrowing costs, which stalled the momentum of tech stocks. It also eroded the value of long-term bonds just as venture capital began drying up, forcing start-ups to draw down funds. It meant the bank “was sitting on a mountain of unrealized losses in bonds just as the pace of customer withdrawals was escalating”, said CNN.
Attempts to shore up its balance sheet by selling off securities at a loss last week triggered a panic among investors, who began pulling their money out, prompting SVB’s share price to plummet, with regulators called in on Friday.
Vox said the “sudden, swift collapse” was the second largest bank failure in US history – behind only Washington Mutual, which had $434bn in assets when it crashed in 2008 – and the biggest since the height of the financial …read more
Source:: The Week – All news