Silicon Valley Bank collapse: What happened and how will it impact Europe?

March 15, 2023 by
Frank Calviño
Silicon Valley Bank

The second worst banking collapse in the history of the United States - second only to the 2008 disaster - happened a few days ago, forcing the public authorities to mobilize $25 billion to prevent a generalized banking panic and the total collapse of the system. 

These events inevitably take us back to the financial crisis that began 15 years ago and revive many fears we thought we had already overcome. 

However, the truth is that this banking collapse has practically nothing to do with that of Lehman Brothers, and the same will be true of its consequences. So, what truly happened? What can be the expected damage derived from this, especially for Europe business and banking? Let us dive deeper into it! 

What was the Silicon Valley Bank? 

The Silicon Valley Bank was no ordinary bank. While most commercial banks usually base their business on granting loans to a wide variety of customers (households and companies from many different economic sectors) and managing their deposits, the business of this Californian bank consisted of attracting deposits from large technology companies and offering them certain financial services, among which loans did not stand out. 

While typical commercial banks do business by charging more interest on their loans than the interest they pay on their deposits and other funding sources, Silicon Valley Bank did business in a very different way: by earning a long-term return on the deposits of its wealthy customers.

Bear in mind that since 2010, the US Federal Reserve has been cutting interest rates and flooding the accounts of investment funds with money. 

Many of them, especially venture capital funds, not knowing what to do with so much free money, invested it in start-ups, highly innovative business ventures linked to the latest technologies (including the world of cryptocurrencies), which entailed a considerable risk because it is never certain that such creative ideas will succeed (and if they do it takes some time), but with free and idle money it was worth a try.

With these tech companies having their bank accounts concentrated in Silicon Valley, this bank was awash with money (especially after 2020 with the pandemic: in just one year, it went from $102 billion in deposits to $189 billion). But it could hardly use it to grant loans to its customers because they were large technology companies that did not need them, so it decided to put it to another use: investing in long-term US government bonds (5 or more years). 

And they did it in a big way: the bank had a gigantic investment portfolio as a percentage of total assets of 57% (when the average US bank is 24%). This gave them a reasonable return at a reduced risk: if they simply waited for those terms to expire, they would recover their investment without any problems since the US Treasury always pays its debts.

How is this affecting Europe? 

The situation in the United States soon spilled over to Europe's stock markets. Wall Street closed Friday in the red, while the Dow Jones Industrial Average, the leading stock market indicator, fell by 1.07%. SVB's failure is already considered the most significant bank failure since 2008 and one of the largest in US history.

The effects of this failure are already being felt in Europe. In Spain, the Ibex 35 suffered one of the sharpest falls in the last two months, driven by the collapse of Silicon Valley Bank. At the close of the market, Banco Sabadell lost 5.11 points, compared to 4.22 for Bankinter, 4.21 for Santander, 3.41 for BBVA, and 2.53 for Unicaja.

But it was not only in Spain; other European stock markets also felt the tremors of SVB's bankruptcy. London, Paris, Milan, and Frankfurt recorded falls in the central banks, such as HSBC (4.59%), Finecobank (4.58%), Deutsche Bank (6.22%), and Société Générale (4.49%). 

As Bankinter's analysis department explains to El Mundo news site "the problem with the SVB case is that there is fear that customers will withdraw deposits, the risk of a possible liquidity crisis, and the contagion effect on the sector".

For his part, iBroker analyst Antonio Castelo is also quoted by El Mundo and explains the particularities of this bank, "with a very particular profile dedicated to financing very young companies in the US, therefore companies that need a lot of financing to get started". In addition, he adds, in theory, it can have a 'contagion effect', although in practice, "we must bear in mind that it is something particular to a bank with this profile in the US. We must not forget that money is fearful and investors may initially react like the one we saw on Thursday".

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