Why SVB failed?

Why SVB failed?

News: The downfall of the US-based Silicon Valley Bank (SVB) is the largest failure of a financial institution since the global financial crisis of 2008.

 The financial institution best known for its relationships with high-flying world technology startups and venture capital experienced a bank run.
 A bank run, which is typically the result of panic (customers withdraw their deposits simultaneously) rather than true insolvency, pushes a bank into actual insolvency.
 Bank runs have occurred throughout history including during the Great Depression and the 2008-09 financial crisis.

Why SVB failed?
 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.
 SVB’s customers were largely startups and other tech-centric companies that 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.
 Bank’s failure to raise additional capital and exceeding losses potentially resulted in insolvency and assets of SVB were seized to protect deposits still remaining with bank.

What are its implications?
 The SVB’s large deposits (startups and wealthy tech workers) are unsafe.
 The Federal government insures deposits up to $250,000 and anything above it is considered uninsured and likely to be released in an orderly process.
 However, several businesses want to access funds to meet payroll and office expenses, failure of access to funds could lead to furloughs/layoffs.
 There is no potential buyer of SVB as things stand.

Will it lead to repeat of 2008 financial crisis?
 SVB was large but had a unique existence by servicing nearly exclusively the technology world and VCbacked companies.
 Other banks are far more diversified across multiple industries, customer bases and geographies and could survive a deep recession and a significant rise in unemployment.
 The most recent round of “stress tests” by the Federal Reserve of the largest banks and financial institutions showed that all of them would survive a deep recession and a significant rise in unemployment.
 However, there might be economic ripple effects in the Bay Area and in the technology start-up world if the remaining money can’t be released quickly.

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