Fears of a broader financial sector collapse appear to be unfounded for the time being, but that doesn’t mean the downfall of the Silicon Valley lender won’t have serious repercussions.
Since the Federal Reserve started lifting interest rates 12 months ago, Wall Street strategists such as Bank of America guru Michael Hartnett have warned that aggressive monetary policy tightening always ‘breaks’ something.
And on Friday night, the little known Californian lender Silicon Valley Bank – which served half of all venture-backed companies in the US and 44 per cent of the venture-backed technology and health-care companies that went public last year – collapsed into receivership just days after trying to raise capital to offset deep losses it suffered on the sale of bonds and other securities.
In a reference to those GFC fears, Goldman Sachs credit analyst Lotfi Karoui says this is “not your older brother’s systemic risk repricing”. But as interest rates surged, two things have happened. First, tech valuations have fallen and funding has dried up, forcing tech companies to call on those deposits more frequently.and bond yields in the last 12 months mean the value of the bonds SVB was holding against its deposits have fallen dramatically .
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