Regulators have long warned that the end of low interest rates could trigger sudden crises in unexpected “areas” of global finance.

So when Silicon Valley Bank (SVB) collapsed amid a funding crunch, investors were left wondering whether its plight was a harbinger of wider trouble.

The big banks are much better capitalized than they were before the global financial crisis, and SVB’s deposit base was unusually concentrated in venture-backed startups. However, the sell-off in banking stocks that followed SVB’s woes reflected concerns that the impact of rate rises could hurt at least the most vulnerable lenders.

1. What happened to SVB?

As the only publicly traded bank focused on Silicon Valley and tech startups, SVB was deeply embedded in the US startup ecosystem. According to its website, it has worked with nearly half of venture capital-backed startups and 44% of venture capital-backed US tech and healthcare companies that went public last year.

Its clients include Shopify, VC firm Andreessen Horowitz and cybersecurity firm CrowdStrike Holdings. On March 8, its parent company, SVB Financial Group, announced that it was selling a $21 billion bond portfolio at a loss of $1.8 billion, and that it would then sell $2.25 billion worth of stock to support the its capital base.

That upset several prominent venture capital investors, including Founders Fund, Coatue Management and Union Square Ventures, who reportedly advised their portfolio companies to pull their money from the bank. By March 10, the effort to raise new shares or find a buyer had been abandoned and the bank was placed under the administration of the Federal Deposit Insurance Corp. (FDIC).

2. What does this mean for SVB and its customers?

The FDIC announced that it has created a new bank, Deposit Insurance National Bank of Santa Clara, to hold SVB’s assets. He said insured depositors – those with $250,000 or less in their accounts – would have access to their money by March 13.

Foreclosure usually means that a bank’s deposits will be taken over by another healthy bank, or the FDIC will pay depositors up to the insured limit.

Typically, the FDIC sells the assets of a failed bank to other financial institutions and pays those with uninsured deposits from those proceeds. Uninsured depositors will receive a collection certificate for the remaining amount of their uninsured funds, the regulator said, adding that it does not yet know that amount.

3. Could a buyer appear?

It is not a given, although it is possible. A transaction could involve selling the bank’s assets in whole or in part, Bloomberg reported, citing a person familiar with the matter who said the goal is to complete a deal by Monday. In the 2008 financial crisis, US regulators set a precedent by settling the troubled sales of Bear Stearns and Merrill Lynch to JPMorgan Chase and Bank of America respectively. But these failed banks were considered systemically important because of their debt obligations to other banks. For this reason, it is not clear that SVB will receive the same treatment.

4. Why did SVB prove so vulnerable?

There have been several factors, but the main one is the rapid rate hikes by the Federal Reserve to tame the highest inflation in decades. These interest rate increases that hit SVB particularly hard hit high-tech companies, which were also the bank’s main customers. As the venture capital ran out, SVB’s clients used their deposits to withdraw the cash they needed to keep going.

5. What happened after these fund withdrawals?

To cover the gap, SVB had to sell assets – mainly bonds that had lost a significant portion of their value. That caused losses of $1.8 billion that would not have hurt the bank’s balance sheet if the bonds had been held to maturity. Here again, SVB’s funding structure had made it particularly vulnerable. All US banks keep some of their money in Treasuries and other securities, but the Fed’s hikes have hurt the value of those bonds.

6. Why are there fears of crisis contagion?

First, SVB’s problems coincided with the abrupt closure of Silvergate Capital, although the two cases are largely unrelated.

At Silvergate, the issue involved deposits that started last year, when customers – cryptocurrency businesses, mainly – withdrew cash to deal with the collapse of the FTX exchange.

Even before SVB’s woes became public, US bank stocks had been under pressure after KeyCorp warned of growing pressure to reward savers: As interest rates rise, depositors may turn to banks that offer higher interest rates. Analysts say the pressure is hitting regional banks hardest.

7. Did anyone see the crisis coming?

There were already heightened concerns about the impact of rising interest rates on bank balance sheets. While rising interest rates boost banks’ revenues, in the short term they force them to reduce the value of the assets they hold.

In total, US banks had recorded potential losses of $620 billion on their held-to-maturity bonds at the end of last year, according to the FDIC.

Already, the agency had warned that these potential losses had affected the declared share capital of the banks. By January, SVB’s chief financial officer was assuring investors that there was no desire to change the bank’s available-for-sale portfolio. Everything suddenly changed this month.

moneyreview.gr with information from Bloomberg