MacroscopeSVB is a casualty of the sharp repricing of debt across the world. Expect more to follow

It’s becoming clear that investors and regulators have underestimated the scale of the damage wrought by the sudden surge in borrowing costs

SVB’s demise, in the wake of the UK pensions debacle, signals that a slow-burn financial crisis is unfolding

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A display lists Silicon Valley Bank achievements as customers gather to withdraw money at SVB’s headquarters in Santa Clara, California, on March 13. Photo: AFP

Published: 9:30pm, 16 Mar 2023

Once is an accident. Twice is a coincidence. But three times, as the saying goes, is a pattern.

A popular explanation for the sudden collapse last Friday of Silicon Valley Bank (SVB) – the biggest US bank failure since the 2008 financial crash – was that the cause of its demise was idiosyncratic, limiting the risk of broader contagion to the world’s larger, systemically important, banks.

There is some truth to this. The balance sheet of SVB – which played a key role in financing venture-backed US technology and life sciences firms – was an outlier in the industry. Not only did the bank’s deposits rise much faster than those of its peers during the Covid-19 pandemic, they were heavily concentrated in the volatile tech sector, with as much as 95 per cent of the deposit base uninsured.

Moreover, SVB invested these deposits overwhelmingly in long-dated debt, such as mortgage bonds and US Treasuries, without hedging against interest rate risk. Although previously deemed safe, the bonds suffered a sharp fall in prices last year when the Federal Reserve began raising rates aggressively, saddling SVB with heavy losses when depositors withdrew their money en masse.

Yet, although SVB’s asset-liability management may have been exceptionally poor, the underlying cause of its implosion is identical to the one that threatened the solvency of Britain’s pension funds last September.

SVB’s demise comes after two other US lenders, Silvergate Capital and Signature Bank – which both had heavy exposure to cryptocurrencies – also collapsed abruptly. It is the second major blow-up triggered by the rapid repricing of debt across the globe. If one includes less dramatic shocks, such as the downturn in commercial and residential property and heavy outflows of capital from emerging markets, it is clear that a creeping financial crisis is unfolding.