Silicon Valley Bank: why did it collapse and is this the start of a banking crisis?

Four decades ago, Silicon Valley Bank (SVB) was born in the heart of a region known for its technological prowess and savvy decision making.

The California-headquartered organisation grew to become the 16th largest bank in the US, catering for the financial needs of technology companies around the world, before a series of ill-fated investment decisions led to its collapse.

The initial market shock of Covid-19 in early 2020 quickly gave way to a golden period for startups and established tech companies, as consumers spent big on gadgets and digital services.

Many tech companies used SVB to hold the cash they used for payroll and other business expenses, leading to an influx of deposits. The bank invested a large portion of the deposits, as banks do.

The seeds of its demise were sown when it invested heavily in long-dated US government bonds, including those backed by mortgages. These were, for all intents and purposes, as safe as houses.

It took just 48 hours between the time it disclosed that it had sold the assets and its collapse.

Given banks only keep a portion of their assets as cash, they are susceptible to a rush of demand from customers.

Customers were now aware of the deep financial problems at SVB, and started withdrawing money en masse.

Two days after it announced it would raise capital, the US$200bn company collapsed, marking the largest bank failure in the US since the global financial crisis.

Financial futures, which allow investors to speculate on future price movements, rallied for the US technology sector in response to the guarantees.

Governments and regulators around the world, including in the UK and Australia, are checking for SVB exposure in their corporate and banking sectors.

To counter the risk, the Federal Reserve has unveiled a new program that allows banks to borrow funds backed by government securities to meet demands from deposit customers.

This is designed to prevent banks from being forced to sell government bonds, for example, that have been losing value due to rising rates.

There are, however, more immediate concerns for the technology sector.

SVB catered for Silicon Valley, backing startups and other technology companies that traditional banks might shy away from.

In recent months, the sector has been cutting staff as economic conditions deteriorate. At a time they need financial backing, one of its biggest supporters has collapsed.

However, late on Sunday US agencies extended a guarantee to cover all deposits at the bank, as well as for customers at a second smaller institution, Signature Bank, that collapsed over the weekend. It means customers at SVB will be able to access all their money on Monday morning.

Central banks around the world have been raising rates over the past year to tame high inflation, with the US moving from near zero to more than 4.5% at a rapid pace.

Most forecasters expect rates to go higher in the US, UK and Australia, before stabilising.