Authorities seek to play down systemic risk threat after Silicon Valley Bank failure

Senior officials on both sides of the Atlantic have sought to downplay the systemic risk threat posed by the sudden collapse of Silicon Valley Bank (SVB).

US regulators stepped in to seize the assets of SVB on Friday (10 March) after a run on the bank, the largest failure of a financial institution since the height of the 2008-9 financial crisis.

SVB collapsed in the US after failing to raise to raise $2.25 billion to plug a loss from the sale of assets, mainly US government bonds, that were affected by higher interest rates. The reported troubles created panic amongst depositors and led to the run on the bank.

US Treasury Secretary Janet Yellen said over the weekend she was working with regulators to respond to the demise of SVB. On an official trip to the US, UK Prime Minister Rishi Sunak 

told reporters the government was “working to recognise the anxiety” of businesses caught up in the crisis, but did not believe there was a “systemic contagion risk”.

SVB, the country’s 16th largest bank, failed after depositors, drawn mostly from the tech sector and venture capital supporting tech, rushed to withdraw their money this week as anxiety over the bank’s situation spread.

The bank was unable to cope with the massive withdrawals of its customers and its last attempts to raise new money did not succeed. US authorities therefore officially took possession of the bank and entrusted its management to the US agency responsible for guaranteeing deposits, the Federal Deposit Insurance Corporation (FDIC).

However, the intervention could go further. US authorities are considering safeguarding all uninsured deposits at Silicon Valley Bank, weighing an intervention to prevent what they fear would be a panic in the US financial system, the Washington Post reported over the weekend.

Despite reassurances, there is concern that the collapse of SVB could trigger a domino effect on other US regional banks and beyond. 

“The good news is it is unlikely an SVB-style bankruptcy will extend to the large banks,” risk and financial advisory firm Kroll said in a research note.

However, it also suggested that small community banks could still face issues and the risk is “much higher if uninsured depositors of SVB aren’t made whole and have to take a haircut on their deposits,” Kroll added.