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Silicon Valley Bank (SVB) Collapse Explained3 min read

March 13, 2023
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Silicon Valley Bank (SVB) Collapse Explained3 min read

“Silicon Valley Bank collapse may lead to 1,00,000 layoffs, impact 10,000 startups”

“Silicon Valley Bank is the largest bank to fail since the 2008 financial crisis.”

These headlines stormed the internet this weekend.

Early last week, the bank was featured in Forbes America’s Best Banks list, and by the end of the week, became the biggest US bank to collapse since the 2008 crisis.

What rattled Silicon Valley Bank (SVB) to this extent? Let’s find out.

First off, a little bit about SVB.

Silicon Valley <> Silicon Valley Bank. We bet your mind has already made the connection. This 40-year old American Bank is a lender to some of the biggest names in Silicon Valley, from the Pinterests to the Shopifys.

In 2020 and 2021, start-up valuations and their stock prices were sky-high. SVB too, grinned from ear to ear. Its deposits shot up from $62 billion at the end of 2019 to $189 billion at the end of 2021.

In an effort to put this money to work (like all banks do, of course), SVB walked straight into a trap. “What’s a safe & stable instrument to invest in?” it thought. The answer usually turned out to be long-dated US Treasury bonds and mortgage bonds. SVB did just that. But this time, it was different.

Soon after, the Fed began raising interest rates to control inflation; interest rates have risen from 0.25% to 4.50% today. And now a quick finance lesson – interest rates & bond prices are inversely related, i.e., if one goes uphill, the other starts tumbling. Consider this, bonds pay a fixed rate of interest. If interest rates are falling, you, the investor, would prefer a fixed-rate bond. But why would you settle for a lower fixed rate if interest rates are rising? Hence, bond prices started to fall as the Fed started hiking interest rates.

SVB was sitting on a mountain of unrealized losses, while start-up funding was drying up. Start-ups began withdrawing their money.

On Wednesday, 8th March, SVB announced that it had sold $21 billion of bonds at a loss of $1.8 billion. A massive panic trigger was then switched on, and we witnessed what is called a “bank run.” A bank run/run on a bank occurs when many depositors, fearing that their bank will be unable to repay their deposits, simultaneously try to withdraw their funds.

This run on made matters so much worse.

By Thursday, 9th March, withdrawals multiplied as the stock price plummeted. And by Friday, 10th March
– Trading in SVB shares was paused after falling 66%
– SVB was unable to find buyers
– Regulators had to step in and place SVB in receivership under the Federal Deposit Insurance Corporation (FDIC)

All this in 48 hours, you say? Well, it seems like this, but the chaos had been brewing for a while.

So, what’s next?

On Sunday, 12th March 2023, the US Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation (FDIC) said that all customers would be protected and be able to fully access their funds following the bank’s collapse.

For the financial sector, most say a ripple effect is unlikely. Banks are pretty well-capitalized after the 2008 debacle, but the smaller ones with risky exposure to the tech and crypto worlds may have a bumpy ride ahead.

How does this affect the Indian stock market, you ask?

Indian stocks bore the brunt of this, with the Bank Nifty falling 1.87% on 10th March and 2.27% on 13th March 2023. Can it fall any lower? Perhaps, but every fall brings new opportunities to invest.

But don’t just sit back and watch; keep a close eye on every sector.



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