Silicon Valley Bank’s Nightmare
We all heard about the 61 Billion USD being wiped out in the market value of bank stocks just because of the Silicon Valley Bank based in California. This was the second-biggest bank crash ever in the United States. Let’s understand how and why such a massive crash occurred.
SVB was the 16th largest bank in the US. It was a crucial bank for early-stage startups and popularly known as the “Startup bank.” This name was also justified, as SVB had funded billions of dollars in venture debt and is the banking partner for almost 50% of US venture-backed companies listed on the stock market. SVB had over 200 Billion USD in assets at the time of failure. So what led to a well-established bank crashing within a couple of days?
To understand this, we must understand how banking works; from all the deposits made by the account holders, banks can loan out cash, keeping 10% (usual approximate) as a reserve with them. The federal reserve sets this amount for the account holders to withdraw their amounts. Banks usually charge higher interest rates on loan amounts, and the difference between the interest rate on the loans and the rates of deposits is how they make money. This is one of the ways banks make money; other ways include investments, trading securities, and banking-related fees.
So let’s take a simple example of 100 people depositing 1 USD with the bank. Bank now has a total of 100 USD, and in the coming months, it will loan out and invests 90 USD. Now, if the majority of the 100 people want to withdraw their cash at a particular time, the system will fail as that bank will be unable to pay back the amount. This is called a Bank Run.
A bank run occurs when a large number of customers withdraw their deposits from a bank, typically out of concern that the bank may become insolvent or unable to meet its financial obligations. This sudden and mass withdrawal of funds can create a liquidity crisis for the bank, potentially causing it to fail. Such situations can be triggered by various factors, including rumors about the bank’s financial health, economic downturns, or geopolitical instability.
SVB also faced the same situation of being subjected to a bank run. SVB had invested its assets in government bonds and mortgage-backed securities to make a return on the cash. This took a turn for the worse as the Fed hiked the interest rates, which led to declining bond prices. So on March 8th, SVB Financial Group decided to make a $2.25 billion share sale after selling $21 billion of securities from its portfolio at a nearly $2 billion loss. This led to widespread market fear and panic, eventually leading to the bank run. SVB’s stock price crashed over 60% in a single day, and on the following day, FDIC and California regulators stopped the bank from operating to minimize the losses. At 6:15 pm EST on Sunday, March 12th, the Treasury, the Fed, and the FDIC issued a joint statement to protect all depositors fully. All accounts at SVB will have full access to their money on Monday morning.
Following this, there was another bank crash in New York. Regulators abruptly closed Signature Bank on Sunday, stating it could risk implications on the border financial system. These are separate incidents with different reasons for regulator intervention, but the impacts of such catastrophes will be seen in the coming future.
In the long term, it will impact the tech job market specifically as SVB’s reliance on its tech and healthcare startup niche, which is already a heavy cash burn industry, with the possibility of interest rates still increasing, the chance of such incidents increases along with the economy moving into a deeper recession. Another scenario is where interest rates drop, and the government prints more money leading the dollar to hyperinflate, eventually weakening its strength. It would be interesting to see how the economy pans out in the coming months.
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