Silicon Valley Bank Collapse, Is this the start of the banking crisis?

Introduction:

Silicon Valley Bank (SVB) was established, four decades ago. It is in the center of a region renowned for its technological prowess and savvy decision-making.

The Silicon Valley Bank with its headquarters in California grew to become the 16th largest bank in the United States. It served the financial needs of technology companies all over the world. Before going bankrupt as a result of a series of disastrous investment decisions.

Why is it happening to Silicon Valley Bank?

During the pandemic, SVB’s services were high in demand because it was the tech sector’s preferred bank.

As consumers spent a lot of money on gadgets and digital services. The initial market shock of Covid-19, at the beginning of 2020 quickly. It gave way to a golden period for established tech companies and startups.

A surge in deposits resulted from the use of SVB by numerous tech companies to hold cash for payroll and other business expenses. As is typical of banks, a significant portion of the deposits is invested.

When it invested heavily in long-dated US government bonds. Also including those backed by mortgages, the seeds of its demise were planted. For the most part, these were as secure as houses.

However, bonds are inversely correlated with interest rates; at the point when rates rise, security costs fall. SVB’s bond portfolio started to lose a lot of value. As a result of the Federal Reserve’s rapid rate hikes to combat inflation.

SVB would receive its capital back if it could hold onto those bonds for a number of years until they mature. However, many of the bank’s customers began using their deposits as the economy deteriorated over the past year, particularly for tech companies.

SVB needed more money available, thus it began selling a portion of its securities at steep misfortunes, scaring financial backers and clients.

Between the announcement that it had sold the assets and its collapse, it only took 48 hours.

What sparked the bank’s runaway?

Because banks only hold some of their assets in cash, they can be overwhelmed by customer demand.

The run began on March 8 when SVB announced a $1.75 billion capital raise. Despite the fact that the company’s issues are the result of earlier investment decisions. It informed investors that it needed to fill a gap left by the sale of its bond portfolio, which was losing money.

Fariborz Moshirian, director of the Institute of Global Finance and professor at UNSW. He states,

“Suddenly everyone became alarmed that the bank was short of capital.”

Customers began making mass withdrawals of cash as soon as they became aware of SVB’s severe financial difficulties.

Dissimilar to a retail bank that cooks for businesses and families. SVB’s clients would in general have a lot bigger records. As a result, there was a quick bank run.

The US$200 billion company failed two days after announcing that it would raise capital. This was the largest bank failure in the US since the global financial crisis that is reported to be Blogging Guru.