SILICON VALLEY BANK COLLAPSES, HOW ?

 

What Has Happened ?

On Friday, Silicon Valley Bank, a lender to some of the biggest names in the tech world, became the largest bank to fail since the 2008 financial crisis.

The move put nearly $175 billion in customer deposits under the control of the Federal Deposit Insurance Corp.

Regulators Takeover the Bank

The California Department of Financial Protection and Innovation shut down Silicon Valley Bank on Friday,

Less than two days after the bank tried to persuade clients not to pull their money over concerns it was running low on available cash.

The regulator appointed the Federal Deposit Insurance Corp. as the receiver.

Why Did the Bank Fail ?

Silicon Valley Bank was hit hard by the downturn in technology stocks over the past year as well as the Federal Reserve's aggressive plan to increase interest rates to combat inflation.

The bank bought billions of dollars worth of bonds over the past couple of years, using customers' deposits as a typical bank would normally operate.

These investments are typically safe, but the value of those investments fell because they paid lower interest rates than what a comparable bond would pay if issued in today's higher interest rate environment.

Typically that's not an issue, because banks hold onto those for a long time unless they have to sell them in an emergency.

It’s A Bank for Startup

Silicon Valley Bank is a bank for startups. It opened accounts for them, often before larger lenders bothered, and also lent to them, something other banks are reluctant to do because few startups have assets as collateral. As Silicon Valley boomed over the past five years, so did Silicon Valley Bank. Silicon Valley Bank's customers were bubbling over with money. They needed more money to store than to lend.
As a result, silicon valley bank's deposits more than quadrupled - from $44 billion at the end of 2017 to $189 billion at the end of 2021 - while its loan portfolio grew only from $23 billion to $66 billion. Since banks make money on the spread between the interest rate they pay on deposits (often nothing) and the interest rate they receive from borrowers, it's a problem that the deposit base is much larger than the loan book. silicon valley bank has had to acquire other interest-bearing assets. By the end of 2021, the bank had $128bn of investments, mostly in mortgage bonds and government bonds.

Depositors Starts Withdrawing

The startups and other tech-centric companies started becoming more needy for cash over the past year.

Venture capital funding was drying up, companies were not able to get additional rounds of funding for unprofitable businesses, and therefore had to tap their existing funds,

Often deposited with Silicon Valley Bank, which sat in the center of the tech startup universe.

So Silicon Valley customers started withdrawing their deposits.

Initially that wasn't a huge issue, but the withdrawals started requiring the bank to start selling its own assets to meet customer withdrawal requests.

Because Silicon Valley customers were largely businesses and the wealthy, they likely were more fearful of a bank failure,

Since their deposits were over $250,000, which is the government-imposed limit on deposit insurance.

That required selling typically safe bonds at a loss, and those losses added up to the point that Silicon Valley Bank became effectively insolvent.

The bank tried to raise additional capital through outside investors, but was unable to find them.

The fancy tech-focused bank was brought down by the oldest issue in banking: a good old' run on the bank.

Bank regulators had no other choice but to seize Silicon Valley Bank's assets to protect the assets and deposits still remaining at the bank.

What Happens Next ?

There are two large problems remaining with Silicon Valley Bank, but both could lead to further issues if not resolved quickly.The most immediate problem is Silicon Valley Bank's large deposits.

The Federal government insures deposits to $250,000, but anything above that level is considered uninsured. Second, there's no buyer of Silicon Valley Bank.

Typically bank regulators look for a stronger bank to take on the assets of a failing bank, but in this case, another bank hasn't stepped forward.

A bank buying Silicon Valley Bank could go a long way to resolving some of the problems tied with the money that startups can't get to right now.

REPEAT OF 2008 CRISIS?

At the moment, no, and experts don't expect there to be any issues spreading to the broader banking sector.

Silicon Valley Bank was large but had a unique existence by servicing nearly exclusively the technology world and VC-backed companies.

It did a lot of work with the particular part of the economy that was hit hard in the past year.

 

Article Compiled by:-

Mayank Garg

+91 9582627751

 

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including newspapers, Journals, Bare Acts, Case Material. Charted Secretary etc.

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