Silicon Valley Bank (SVB), established in the year 1983, was a well-known bank for lending capital to tech startup companies. SVB has invested in tech companies like Airbnb, Fitbit, Pinterest, etc., It was the 17th largest bank in the United States and had 15 offices in U.S. states but it was defunct on 10th March 2023. So, how did this bank collapse? What are the reasons behind this? Let's see in this blog.
How collapse started?
- SVB CEO Gregory Becker sold $3.6 million worth of bank shares before the failure. It hit the news channels like a fire in the forest. If a promoter is selling shares of a company then it is not a good sign for retail investors and it also affects the performance of the company.
- When the promoters become pessimistic about the company's performance, they start offloading the shares which leads to a sharp fall in the share price of the company.
- In a single day, the share price of SVB stock had dropped by 60% leading to its crisis.
- There were $175 billion of customer deposits in SVB after the dysfunction of SVB.
- In U.S. history, it was one of the largest banking failures.
What happened to those $175 billion?
In the United States, there is an independent agency known as Federal Deposit Insurance Corporation (FDIC) backed by Congress to intervene in such situations where banks like SVB got defunct.
The FDIC created a new bank National Bank of Santa Clara to hold the deposits and other assets of the SVB.
According to FDIC, a customer is liable to receive a maximum of $250,000 (Rs 2 Cr.) even if a bank got decommissioned. Suppose a customer is having a Bank account in SVB with $20,000 but SVB got decommissioned then that $20,000 is not wasted. FDIC is liable to pay that $20,000 to its customer.
In India also, there is a policy known as Deposit Insurance Credit Guarantee Corporation that insures Rs 5 Lakh insurance to their customers even after the bank got decommissioned.
Why SVB Collapsed?
- A Decline in Tech Stocks over the Past Few Years:
In the past few years, there was a downfall in tech stocks. Tech giants and startups were facing some difficulties after the pandemic. So, it affected SVB also.
Image credits: Statista
- Change in Bonds Rate:
Bank bought billions of dollars worth of bonds over the past couple of years as safe investments, but Federal Reserve increased the interest rates to beat inflation. Nevertheless, the value of previously issued bonds has started to decline as they offer lower interest rates compared to bonds currently being issued in the prevailing high-interest rate climate.
According to American Banker SVB shares fall sharply after $1.8 Billion in surprise bond losses.
Venture capitalists and startups continue to withdraw their money from SVB, but due to insufficient funds, SVB was unable to return their money and this led to the Bank Run situation.
Bank Run: It is a banking crisis situation when many depositors believe that the bank is going to cease. So, they withdraw their money from the bank.
If startups don't have funds then they can neither provide salaries to their employees nor can hire new employees and this led to layoffs that create unemployment. It was creating a snowball effect in the ecosystem.
- No Buyer of SVB:
In such situations, when a bank is failing to raise funds then the bank regulators look for a stronger bank to take on the assets of a failing bank, but unfortunately, there was no other bank there to acquire SVB. Finally, this bank got defunct on 10th March 2023.
Conclusion
The SVB failed due to a sharp decline in bond interest rates. The Federal Reserve raised interest rates to combat inflation, but SVB held bonds with low-interest rates, which caused the bonds to fall in value, causing a bank run and a snowball effect. Finally, after the collapse of SVB, the National Bank of Santa Clara came into the picture and the failure of SVB is known as the second-largest banking failure after the 2008 crisis.
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