What the Silicon Valley Bank crash means for the UK property market

Silicon Valley Bank is the biggest US lender to fail since 2008 financial crisis.

The crash has an impact on economies around the world, including the UK.

The bank was the 16th largest bank in the United States and as a result 300 technology businesses have signed a letter to Chancellor Jeremy Hunt that ‘losing their deposits would cripple the sector’.

What does it mean for the UK and the property sector? This blog post explains.

 

What is Silicon Valley Bank?

Silicon Valley Bank was one of the largest banks in the USA, worth more than $200bn dollars.

It was born in a region well know for its technological prowess and savvy decision making. 

The California-headquartered organisation catered specifically for the financial needs of technology companies around the world.

 

What was the cause of the Silicon Valley Bank crash?

Silicon Valley Bank’s services were in great demand during the pandemic as they catered for the tech sector, as consumers invested heavily in new equipment and services.

According to the Guardian, “Many tech companies used SVB to hold the cash they used for payroll and other business expenses, leading to an influx of deposits. The bank then invested a large portion of the deposits, as banks do.

“The seeds of its demise were sown when it invested heavily in long-dated US government bonds, including those backed by mortgages. These were, for all intents and purposes, as safe as houses.

“But bonds have an inverse relationship with interest rates; when rates rise, bond prices fall. So when the Federal Reserve started to hike rates rapidly to combat inflation, SVB’s bond portfolio started to lose significant value.

“SVB didn’t have enough cash on hand, and so it started selling some of it’s bonds at steep losses, spooking investors and customers.”

 

What caused the run on the banks?

Banks only keep a portion of their assets as cash and are susceptible to a rush from customers. The issues with SVB was triggered by earlier investment decisions. On the 8 March it was announced that $1.75bn capital raising and investors were needed to plug the hole due to the loss-making portfolio.

“Suddenly everyone became alarmed that the bank was short of capital,” says Fariborz Moshirian, professor at UNSW and director of the Institute of Global Finance.

Customers were now aware of the deep financial problems at SVB and started to withdraw money en masse.

 

What was the impact of the Silicon Valley Bank collapse on the world economy?

Prime Minister Rishi Sunak, Chancellor Jeremy Hunt and Bank of England Governor, Andrew Bailey held crisis talks until late on Saturday night due to concerns on the UK’s technology and life science sectors.

HSBC, Europe’s largest bank has just acquired the UK branch of SVB for £1. This followed the US government’s move to secure all US customer deposits during the weekend.

The government in the USA is not saving SVB and so it will stay collapsed unless a buyer is found. On Sunday, US agencies extended a guarantee to cover all deposits at the back (as well as for customers at a second smaller institution, Signature Bank, that collapsed over the weekend). This means that customers will be able to access all of their money.

The demise of the bank has had a sharp impact on stock markets. In the UK, the FTSE100 was down 2% and FTSE 250 losing 2.7%. 

In the banking sector, shares in HSBC, which bought the UK arm of SVB for £1 after a weekend of fraught negotiations, have fallen as much as 4.6pc, with Lloyds down as much as 4.8pc, Barclays falling 5.8pc and NatWest dropping as much as 5.4pc.

What does the banking crisis mean for interest rates?

Central banks around the world have been raising rates over the past year to tame high inflation, with the US moving from near zero to more than 4.5% at a rapid pace.

Most forecasters expect rates to go higher in the US, UK and Australia, before stabilising.

The appetite to keep raising rates will now be tested if central banks become concerned that SVB’s problems are indicative of a broader weakness in corporate balance sheets caused by rising rates.

What does it mean for investors?

The impact of the Silicon Valley Bank crash shows the insecurity in stocks as well as highlighting the risks of keeping money stored in savings accounts.

It reiterates that property is the safest form of investment. 

Touchstone Education’s Paul Smith said, “In a short period of time three banks have failed at $210 billion has been wiped out. The Federal Government have had to come in with a $250,000 guarantee.

 “As I explained in the Wealth Predictions webinar earlier this year, interest rates cannot go much higher than 5% otherwise things will break in the system and this is a working example. As a result mortgage rates will decrease in the next few months, creating more opportunities for investors to buy properties.”

Paul will explain more on the Silicon Valley Bank crash and potential impact of the Spring Budget on the economy in this week’s free spring budget webinar on Thursday at 8pm: https://shrtlnk.co/scRn9

To find out more information about the property investment courses we offer call us on 01302 897131 or email office@touchstoneeducation.co.uk.