Silicon Valley Bank collapse explained

 The fall of the Great Silicon Valley Bank

Background of Silicon Valley Bank:

Silicon Valley Bank was established in Santa Clara, California in 1983. Initially founded to cater to the banking needs of the emerging tech industry, SVB quickly gained recognition for its expertise and tailored financial services. As Silicon Valley flourished, so did the bank, capitalizing on the region's innovative spirit and becoming the go-to financial partner for tech startups.

Why did Silicon Valley Bank collapse?? Reasons

Prior to 2022, when interest rates were low, a significant portion of SVB's deposit money were put in bonds. As a result, by 2022 the bank held securities valued at $91.3 billion in its control.  The value of SVB's invested bonds declined as a result of the Fed starting to raise interest rates in 2022.

As the Fed raises interest rates, demand for existing bonds, which were issued at lower interest rates, decreases, resulting in a decline in the value of these bonds. Additionally, the rising interest rates sparked an economic downturn that caused venture capital companies to cut back on their support for entrepreneurs.

Venture capital-backed companies SVB deposits reduced along with the amount of cash available for startups. SVB was forced to sell its bonds at a loss in order to preserve its liquidity, which cost the bank $1.8 billion. SVB has announced a $2.25 billion stock sale to raise money for the bank to avoid a liquidity deficit. The stock price fell by 60% intraday as a consequence, creating a pessimistic mood in the market.

What is the Meaning of a Bank Run?? What happened with SVB??

A bank run occurs when several customers start hastily withdrawing their savings. As if there is some fire in the bank and all of their money kept in the bank is getting burnt. Banks are unable to handle a heavy surge of withdrawals because they do not have adequate deposits on hand.

As a result, banks are unable to cover customer withdrawals. This is a classical Bank run.

The Aftermath of this Bank Crisis

SVB wouldn't be able to process the withdrawal requests if there was a bank run. The bank collapsed on March 10th as a result of $42 billion in deposits leaving the institution.

In the second-largest bank failure in American financial history, SVB was taken over by the FDIC. This was the biggest bank collapse in America after 2008. When the FDIC (Federal Deposit Insurance Corporation) assumes control of a bank, it has failed.

Impact on the clients of the Bank

For each kind of account, the FDIC protects bank deposits up to $250,000 per depositor per bank. In other words, you would receive a full refund if you had $250,000 in a Silicon Valley Bank account. Unfortunately, deposits in most Silicon Valley Bank accounts exceeded $250,000, as most of them were startups and big firms making the majority of the money uninsured.