Silicon Valley Bank’s Bankruptcy. Announcement of Tighter Regulations

Most of the leading indices were down at the end of Monday’s session on Wall Street after the announcement of the Silicon Valley Bank’s bankruptcy. It is the latest collapse of a major US financial institution, following the recent failures of Silvergate and Signature banks. This resulted in the announcement of greater regulations in the financial sector.

Silicon Valley Bank’s Bankruptcy. Biggest US Bank Failure Since 2008

Silicon Valley Bank’s bankruptcy sets the tone of investor sentiment. The sixteenth-largest American bank declared bankruptcy on Friday, March 10, 2023. This event caused the largest banking collapse in the US since the financial crisis in 2008. Moreover, if we count the size of assets, it is also the third largest bankruptcy of a company in the history of the United States. After Washington Mutual and, of course, Lehman Brothers. In the case of SVB, it was over USD 200 billion.

Investors are still worried about what happened in the last few days and are waiting with bated breath to see if the effects in the financial sector continue to spread and cause more problems. The Dow Jones (DJI30) closed down -1.0% on Monday (March 13) and amounted to 32.33 points. The S&P 500 (SPX500) fell 1.25 percent at the end of the day and amounted to 3806 points. The Nasdaq 100 (NDX100) plunged 0.30 percent and closed the session at 11.94 points.

Let me add that a large portion of startups, companies, and investment funds from Silicon Valley invested their money in SVB.

What Caused The Silicon Valley Bank’s Bankruptcy?

There are two main reasons why the Silicon Valley Bank collapsed. The first was a small diversification of deposits. SVB was a Californian bank that mainly provided services to startups. The deposits held by the bank belonged almost exclusively to startup companies. There were very few deposits from individuals, which significantly increased the bank’s liquidity risk. Liquidity was provided almost exclusively by investors, who gradually took away part of their funds at the time of the Fed’s successive increases in interest rates – in total, over USD 40 billion.

The second reason was the low diversification of assets. In the case of SVB, these were almost exclusively bonds – over 50%. Standard banks increase their financial security by disbursing loans to various entities and people. SVB, however, had a lot of money invested in government bonds, which became volatile and started to depreciate as their yields rose. SVB booked these as unrealized losses and held them, waiting for their value to increase, but things just kept getting worse. Startups started to withdraw their money from deposits at the Silicon Valley Bank. As a result, SVB forcedly liquidated some of its bonds at a low price as cash was withdrawn from its accounts and decreased the money in the Bank. Eventually, losses reached several billion dollars and ate up SVB’s equity.

Greater Regulations in the Banking Sector are Coming. The Fed i responding

After the Silicon Valley Bank’s bankruptcy went public, US President Joe Biden said he would ask the US Congress to strengthen banking system regulation. What’s more, he added that the government provides access to deposits in failed banks. The collapse of Silicon Valley Bank and Signature Bank raised fears of a full-blown banking crisis. On Sunday, Biden said he was determined to hold those responsible for accounting.

In turn, the Fed established a fund that will take bonds at nominal prices as collateral, thanks to which banks obtain the necessary liquidity without selling instruments at a loss.