After a decade of easy money, the chickens are coming home to roost

‘Analysts compared it to a Silicon Valley quake with aftershock in the US and transatlantic tremors’

In the same way the once-provincial building society Northern Rock was the unexpected canary in the coal mine of the global financial crash, could a little-known California bank trigger the next big meltdown? On the face of it, it seems just as unlikely yet that was the fear that gripped investors in a hair-raising end to the week for financial markets.

Silicon Valley Bank was a prolific financier of start-ups, accounting for nearly half the technology and healthcare companies that listed on stock markets last year.

After launching an emergency $2.3bn (£1.9bn) share sale to bolster its balance sheet barely 24 hours earlier, the bank has been shut down and taken into receivership by US regulators in a jaw-dropping turn of events. The Federal Deposit Insurance Corporation was forced to step in after SVB’S scramble for rescue funds triggered panic. A 60pc plunge in the shares of parent company SVB Financial Group was the catalyst for a massive rout in banking stocks, first on Wall Street then across Europe.

A plea from SVB’S boss to “stay calm and don’t panic” fell on deaf ears, and investors scrambled for safety instead.

Analysts at AJ Bell compared it to a Silicon Valley “earthquake” with the aftershock centred in the US and tremors felt across the Atlantic. It’s early days but even that may prove to be an understatement.

The real concern is that what unfolded with lightning speed at SVB is the first crack in the financial system triggered by an unexpectedly prolonged rise in global interest rates.

The bank was forced into a rescue fundraising to shore up its financial position after suffering steep losses on a fire sale of its vast bond portfolio. It took a $1.8bn hit after offloading $21bn of government securities, a move that was prompted by a flurry of customer demands for their deposits back.

This in itself, though shocking as it is to see a bank so easily toppled, shouldn’t be enough to shake the foundations of global finance. Indeed, banking experts say that SVB was somewhat unique in financial circles because few other banks have as much of their assets locked up in fixed-rate securities. Nor do most other banks have such a high proportion of business customers, which means its funding costs climb more quickly than those where deposits are dominated by retail customers. This made it more vulnerable to the recent spike in interest rates, and the corresponding fall in bond yields.

SVB’S other problem was its acute over-exposure to a struggling technology market – as growth has slowed, funding for start-ups from venture capital and the public markets has begun to dry up, which squeezes the deposit base in both directions.

Nevertheless, SVB’S fate has prompted a collapse of confidence in the wider banking sector as investors question whether what went wrong is symptomatic of a much bigger problem. There seems to be almost universal agreement among analysts that this is not the case, or at least that systemically important banks are not nearly as vulnerable to rate shocks.

The coming days will be decisive. As anyone with even a vague recollection of the financial crash will know, there is always the risk of contagion if investors have already made up their minds.

After a decade of easy money, the chickens are coming home to roost as the fragility of the financial system in the face of rising interest rates is brutally exposed.