Collapse of Silicon Valley Bank will be watched closely

If you hadn’t heard of Silicon Valley Bank (SVB) before Friday, you aren’t the only one. The bank favoured by venture capital firms collapsed, with US regulators taking over the firm. It is a reminder how quickly panics can swamp a lender once confidence falls. The first murmurings of SVB potentially having a problem started to filter out on Thursday when it said it would sell new shares, apparently to offset a wave of withdrawals. A number of venture capital firms advised their client companies to withdraw their deposits from SVB, and by Friday evening the bank was essentially finished.

At this point there are two main concerns arising from the failure of SVB. First, the lender itself banked a huge amount of technology firms – the clue is in its name. By its own account, SVB banked 44 per cent of US venture capital-backed companies which went public in 2022, and about half of all US VC-backed tech and life-science companies. In short, its failure could have a huge knock-on impact on the technology sector which has relied on the bank for venture debt and had deposits sitting in the bank, with the potential impact on paying wages and suppliers.

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Second, the failure has spooked the banking sector around the world. SVB failed in part because of the US Federal Reserve’s interest rate hikes in recent months. That led many of SVB’s bond holdings to decline in value, forcing it to offload them, and crystallising huge losses. Investors are now asking if any other firms face a similar issue. US and European bank shares tumbled on Friday.

For anyone who remembers the start of the global financial crisis 15 years ago, SVB’s failure brings back uncomfortable memories. Back then, small pockets of the financial world blew up well before the collapse of Lehman Brothers – think of the two Bear Stearns hedge funds that fell over in the summer of 2007. SVB almost certainly does not mean anything like this. For now it looks like an overleveraged regional lender that got caught out by the sudden hike in interest rates. But investors will be watching like hawks for any signs of contagion in the wider financial market in the days and weeks ahead.