SVB collapse: Will 2008 Financial crisis repeat? Here’s what experts say

The collapse of Silicon Valley Bank has rattled the markets across the world, raising the most uncomfortable questions: Will the 2008 financial crisis repeat?

Billionaire hedge fund manager Bill Ackman has compared the fall of SVB to "bear Stearns"--the first bank to collapse at the start of the 2007-2008 global financial crisis.

Taking to Twitter, Ackman wrote, "The risk of failure and deposit losses here is that the next, least well-capitalised bank faces a run and fails, and the dominoes continue to fall".

However, some analysts think that the SVB collapse is more company-specific for now. Joe Biden administration has also argued that safeguards enacted after the 2008 financial crisis would protect the country's economy amid the shuttering of Silicon Valley Bank.

US Treasury Secretary Janet Yellen has expressed full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient and regulators have effective tools to address this type of event.

Indian-American Vivek Ramaswamy who is running for the 2024 US Presidential poll questioned whether SVB used ESG factors to price its loans, and compared the "key cause" of the 2008 financial crisis. In a video message, Ramaswamy wrote, "A key cause of the 2008 financial crisis was the use of social factors to make loans (back then, fostering home ownership). When we don’t learn lessons, history repeats itself: did Silicon Valley Bank use ESG factors to price its loans? Roll that log over & see what crawls out".

US Financial commentator Robert Armstrong in his latest opinion piece said that "SVB's collapse is not a harbinger of another 2008".

Armstrong in Financial Times wrote that “The risk of contagion within the banking system appears to be limited. But at the end of every central bank rate-increase cycle,there comes a phase where things in the financial system begin to break. These breakages, minor or major, erode the confidence of investors and consumers, increasing the odds of recessions. The failure of SVB does not herald another 2008, but it does mark the beginning of the breakage phase”.

The risk of contagion within the banking system appears to be limited. But at the end of every central bank rate-increase cycle, there comes a phase where things in the financial system begin to break. These breakages, minor or major, erode the confidence of investors and consumers, increasing the odds of recessions. The failure of SVB does not herald another 2008, but it does mark the beginning of the breakage phase".

Economist Stephanie Pomboy told FOX NEWS, "we are on the brink of a 2008-style financial crisis and I'm not trying to be hyperbolic... We've got some major consequences coming at us, and I think it's going to devolve very rapidly because of all the leverage".

Mike Mayo, Wells Fargo senior bank analyst told cnn.com, said the SVB crisis could be “an idiosyncratic situation.”

“This is night and day versus the global financial crisis from 15 years ago,” he told CNN’s Julia Chatterly on Friday. Back then, he said, “banks were taking excessive risks, and people thought everything was fine. Now everyone’s concerned, but underneath the surface, the banks are more resilient than they’ve been in a generation.”

What was the 2007-2008 financial crisis?

In 2007, the biggest financial crisis since the Great Depression rippled across the globe after mortgage-backed securities tied to ill-advised housing loans collapsed in value. The panic on Wall Street led to the demise of Lehman Brothers, a firm founded in 1847. Because major banks had extensive exposure to one another, the crisis led to a cascading breakdown in the global financial system, putting millions out of work.

How did SVB's crisis happen?

The decline of Silicon Valley Bank partly stems from the Federal Reserve’s aggressive interest rate hikes over the past year.

When US Fed rates were near zero, banks loaded up on long-dated, seemingly low-risk treasuries. And with the incessant rise of the US Fed hike since 2022 to fight against inflation, the value of those assets has reduced, leaving banks sitting on a pile of unrealised losses.

The high-interest rates hit the tech startups mostly, according to Moody's report. That prompted several tech firms to draw down the deposits that they held at SVB to fund their operation.

Besides, with the hike in rates, the value of treasuries, as well as other securities also lowered.

As higher interest rates caused the market for initial public offerings to shut down for many startups and made private fundraising more costly, some Silicon Valley Bank clients started pulling money out to meet their liquidity needs. This culminated in Silicon Valley Bank looking for ways this week to meet its customers' withdrawals. The SVB sold a $21 billion bond portfolio.

SVB announced on Thursday it would sell $2.25 billion in common equity and preferred convertible stock to fill its funding hole. Some SVB clients pulled their money from the bank on the advice of venture capital firms such as Peter Thiel's Future Fund.

This spooked investors such as General Atlantic that SVB had lined up for the stock sale, and the capital raising effort collapsed late on Thursday.

About Silicon Valley Bank (SVB)

Founded in 1983, SVB provided financing for almost half of US venture-backed technology and healthcare companies. It is America's 16th-largest bank and was recently ranked "America's Best bank" on Forbes 2023 list. FSB received this title from Forbes for 5th consecutive year.

The bank served mostly technology workers and venture capital-backed companies, including some of the industry's best-known brands.

Nearly half of the US technology and healthcare companies that went public last year after getting early funding from venture capital firms were Silicon Valley Bank customers, according to the bank’s website.

The bank also boasted of its connections to leading tech companies such as Shopify, ZipRecruiter, and one of the top venture capital firms, Andreesson Horowitz.