Silicon Valley Bank collapse, and is this the beginning of a banking crisis?

Silicon Valley Bank collapse

Silicon Valley Bank (SVB) was established in the heart of a region renowned for its technological prowess and astute decision-making four decades ago. Before collapsing, the Bank with its headquarters in California had developed into the 16th largest bank in the US, serving the financial requirements of tech companies all over the world.

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Silicon Valley Bank: Background

• Throughout the pandemic years, Silicon Valley Bank, SVB’s services were highly sought after as the chosen bank for the technology industry.
• Early in 2020, the Covid-19 market shock caused a swift shift in consumer spending patterns, ushering in a golden age for startups and established IT enterprises.
• There were an abundance of deposits since many tech companies used SVB to store the cash they used for payroll and other company needs. Like all banks, the bank invested a sizable amount of the deposits.
• When it made significant investments in long-term US government bonds, especially those backed by mortgages, the seeds of its collapse were planted. In all actuality, these were just as secure as houses.
• Yet, bonds and interest rates are inversely related; as rates rise, bond prices decline. As a result, SVB’s bond portfolio started to lose a lot of value when the Federal Reserve began raising rates quickly to fight inflation.
• Silicon Valley Bank, SVB would get its capital back if it could hang onto those bonds for a couple of years until they matured.
• However, many of the bank’s clients began withdrawing from their savings as the economy deteriorated during the previous year, notably impacting tech companies.
• Silicon Valley Bank, SVB started selling some of its bonds at high losses because it didn’t have enough cash on hand, which alarmed consumers and investors.
• By the time it revealed that it had sold the assets and the time of its collapse, only 48 hours passed.

Silicon Valley Bank: What caused the bank to undergo a run?

• Banks are susceptible to a surge in client demand since they only retain a part of their assets as cash.
• Notwithstanding the fact that Silicon Valley Bank, SVB’s issues are a result of past investment choices, the run was started on March 8 when the company announced a $1.75 billion capital offering.
• It advised investors that a gap left by the sale of its loss-making bond portfolio needed to be filled.
• Clients began making large-scale withdrawals of cash as soon as they learned about SVB’s severe financial issues.
• Clients of Silicon Valley Bank, SVB often had substantially larger accounts than those of a retail bank that serves both households and businesses. Hence, the bank run was quick.

Is this the rise of the Bank Crisis?

• The collapse of the $200 billion corporation two days after it declared it would raise capital made it the biggest bank failure in the US since the global financial crisis.
• The US government acted swiftly to allay immediate fears of a widespread contagion by insuring all deposits made by bank customers.
• In response to the guarantees, financial futures, which let investors make predictions about future price changes, surged in favour of the US IT sector.
• There had been worries that if that guarantee hadn’t been put in place, owners of Silicon Valley Bank, SVB accounts wouldn’t have been able to pay their staff, which would have had an impact on the entire economy.
• Governments and authorities from all over the world, including those in the UK and Australia, are examining their corporate and banking sectors for Silicon Valley Bank, SVB vulnerability.
• The longer-term question is whether other banks’ overexposure to declining bond prices is comparable to Silicon Valley Bank, SVB’s sensitivity to rising interest rates.
• The Federal Reserve has introduced a new scheme that enables banks to borrow money guaranteed by government securities in order to satisfy depositor demand in order to mitigate the risk.
• This is intended to stop banks from being obliged to sell securities like government bonds that have been depreciating due to rising rates.
• The technology industry faces more pressing issues now.
• Silicon Valley Bank, SVB catered to Silicon Valley, supporting start-ups and other such firms that conventional banks might be hesitant to support.

Has Silicon Valley Bank got a bailout?

• As the economy has gotten worse, the sector has started laying off employees lately. One of its greatest backers has failed just when they needed financial support.
• The government is not intervening to save Silicon Valley Bank, SVB; if no bidder can revive it, it will remain bankrupt and its residual assets would be distributed to creditors.
• To cover all savings at the bank as well as for clients of a second, smaller institution, Signature Bank, which failed over the weekend, US authorities issued a guarantee.
• It implies that Silicon Valley Bank, SVB customers will have access to all of their money on Monday morning.
• The guarantees do not cover some unsecured creditors or the bank’s shareholders.

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Silicon Valley Bank: Effect on Interest Rates

• Over the past year, central banks throughout the globe have increased interest rates to combat excessive inflation, with the US moving quickly from near zero to more than 4.5%.
• The majority of experts predict that rates in the US, UK, and Australia will increase before stabilising.
• If central banks start to worry that Silicon Valley Bank, SVB’s issues are a sign of a wider weakness in corporate balance sheets brought on by rising rates, their willingness to continue hiking rates will now be put to the test.

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