The Collapse of Silicon Valley Bank

Why did Silicon Valley Bank fail?

High rates significantly constrained technology companies, reduced the value of technology stocks, and made fundraising difficult. Faced with higher interest rates, IPO losses, and a funding drought, SVB clients began withdrawing money from the bank.

The collapse of Silicon Valley Bank: here is how and why it happened…

The U.S. Federal Reserve raised interest rates

Silicon Valley Bank was hit hard by the decline in technology stocks over the past year, as well as by the Federal Reserve's aggressive plan to raise interest rates to fight inflation.

The bank bought bonds worth billions of dollars over the past two years, using customer deposits, as a normal bank would typically do.

These investments are usually safe, but their value fell because they paid lower interest than a bond would pay if issued in the current environment with higher interest rates.

Usually this is not a problem, because banks hold them for a long time - except when they need to sell them in an emergency.

Silicon Valley investors became increasingly short of cash

But Silicon Valley clients were mostly startups and other technology-focused companies that needed cash over the past year.

Venture-capital funding was drying up; companies could not raise additional funding rounds for unprofitable businesses and therefore had to use their existing funds - often deposited at Silicon Valley Bank, which was at the center of the technology startup universe.

So Silicon Valley clients began withdrawing their deposits.

At first, this was not a huge problem, but the withdrawals began to require the bank to sell its own assets in order to meet customers' withdrawal requests.

Silicon Valley Bank sold its bond portfolio at a loss

Because Silicon Valley clients were mostly companies and wealthy individuals, they were probably more afraid of a bank failure because their deposits exceeded 250.000 USD, or the limit imposed by the U.S. government for deposit insurance.

This forced the sale of bonds at a loss, and those losses accumulated to the point where Silicon Valley Bank became effectively insolvent.

The bank tried to raise additional capital from outside investors, but it failed to find them.

The ship sank

The technology-focused luxury bank was brought down by the oldest problem in banking and by one of the few means that can certainly destroy a bank: a run on it.

Bank regulators had no choice but to seize Silicon Valley Bank's assets to protect the assets and deposits still remaining at the bank.

The bank's official page svb.com is not working at the moment (13.03.2023, 14:40) and the following notice is displayed: 

What is happening now?

At this point, experts do not expect problems to spread into the wider banking sector.

Silicon Valley Bank was large, but it had a unique existence, serving almost exclusively the technology world. It worked extensively with the special part of the economy that was hit hard over the past year.

Other banks are much more diversified across multiple industries, customer bases, and geographic areas.

However, there could be economic effects, especially in the U.S. technology startup world, if the money currently remaining at Silicon Valley Bank cannot be released quickly.

If recently the FED's desire to continue raising benchmark rates had intensified, today the assumption appears that rates will be put on pause.

Later, Biden gave a speech at the White House and emphasized that the American banking system is “safe”.

The Biden administration will draw from the Deposit Insurance Fund to replenish customers' deposits, President Joe Biden said today, reiterating comments from the heads of the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation that this aid plan will not be financed by American taxpayers.

Against the background of SVB's failure, various financial assets reacted differently:
The dollar index is reacting negatively;
The Crypto 10 index fell slightly on Friday, after which it appreciated by 20%;
Gold is, as usual, in its role as a safe-haven asset during periods when global risks appear in the financial market.

Sources: euronews.com, edition.cnn.com

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