What is Silicon Valley Bank, why did it crash and what happens next?

Silicon Valley Bank was based in California Credit: AP

Silicon Valley Bank (SVB) collapsed last Friday, sparking fears of a potential banking crisis that could spread outside the US.

Chancellor Jeremy Hunt announced on Monday that the UK arm of the collapsed US lender had been bought by HSBC after the government and Bank of England (BoE) stepped in to “facilitate” a private sale.

There had been mounting worries that the collapse of SVB – the second-largest bank failure in history – could also have sent shockwaves through the technology and life sciences sector in the UK, with many of those firms customers of the bank’s British business.

But what is Silicon Valley Bank, why did it crash and what happens next as the biggest US lender fails, since the 2008 global financial crisis?

What is Silicon Valley Bank?

The section of the bank's website dedicated to its UK arm describes SVB as the "go-to banking partner" for founders, entrepreneurs and investors in the "innovation economy".

Mostly SVB, which was set up in Santa Clara, California, served technology workers and venture capital-backed companies, including some of the industry's best-known brands.

The bank's first branch to open outside the US is in Shoreditch, London.

Why did it collapse?

Over in America, Silicon Valley Bank was hit hard as stocks in technology fell in value over the last year. This, teamed with the Federal Reserve's aggressive plan to increase interest rates to combat inflation caused the bank to crash?

The bank bought billions of dollars worth of bonds over the past couple of years, using customers' deposits - as a bank normally would.

This is usually a safe thing to do. But the value of those investments fell because they paid lower interest rates than what a comparable bond would pay if issued in today's higher interest rate environment.

Typically that's not an issue, because banks hold onto those for a long time — unless they have to sell them in an emergency.

But Silicon Valley's customers were largely start-ups and other tech-centric companies.

The companies struggled to get extra funding so customers started withdrawing their Silicon Valley deposits.

This meant the bank had to start selling its own assets to meet customer withdrawal requests.

Because Silicon Valley customers were mostly the rich and businesses, they were likely more fearful of a bank failure since their deposits were over $250,000 (£206,290), which is the government-imposed limit on deposit insurance.

That required selling typically safe bonds at a loss, and those losses added up to the point that Silicon Valley Bank became effectively insolvent.

The bank tried to raise additional capital through outside investors, but was unable to find them. Silicon Valley was brought down by a run on the bank.

Bank regulators had no other choice but to seize Silicon Valley Bank's assets to protect the assets and deposits still remaining at the bank.

Its failure has already caused more than $150 billion (£123,772,500) in deposits to be now locked up in receivership, which means start-ups and other businesses may not be able to get to their money for a long time.

What happens next?

There are two large problems remaining with Silicon Valley Bank, but both could lead to further issues if not resolved quickly.

The most immediate problem is SVB's large deposits, as any over $250,000 (£206,290), is not insured by the Federal Reserve.

The Federal Deposit Insurance Corporation said insured deposits would be available on Monday morning.

However, the vast majority of SVB's deposits were uninsured, a unique characteristic of the bank due to its customers being largely start-ups and wealthy tech workers.

At the moment, all of that money can't be accessed and likely will have to be released in an orderly process.

But many businesses cannot wait weeks to get access to funds to meet payroll and office expenses. It could lead to furloughs or layoffs.

Two, there's no buyer of Silicon Valley Bank.

Typically bank regulators look for a stronger bank to take on the assets of a failing bank, but in this case, another bank hasn't stepped forward.

A bank buying SVB could go a long way to resolving some of the problems tied with the money that start-ups can't get to right now.

What about in the UK?

HSBC and the Treasury said customers of SVB UK will be able to access their deposits and banking services as normal following the sale to HSBC for a nominal sum of £1.

SVB UK had around £6.7 billion of deposits and loans of about £5.5 billion as at Friday last week, while its balance sheet stood at £8.8 billion, according to the BoE

Mr Hunt said: “Today the government and the Bank of England have facilitated a private sale of Silicon Valley Bank UK. This ensures customer deposits are protected and can bank as normal, with no taxpayer support.

“I am pleased we have reached a resolution in such short order.

“HSBC is Europe’s largest bank, and SVB UK customers should feel reassured by the strength, safety and security that brings them.”

The BoE stressed that all services will continue to operate as usual at SVB UK following the deal, with all staff remaining employed by the bank.

The wider UK banking system “remains safe, sound, and well capitalised”, the Bank added.

Shadow Chancellor Rachel Reeves said: “That SVB has a buyer will be a relief to the entrepreneurs and the thousands of people working in the tech and start-up sectors, who woke up facing huge uncertainty this morning.

“Tech and life sciences are vital to getting our economy growing again,” the Labour MP said.

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