Here’s how Silicon Valley Bank collapsed in 48 hours
Here's How Silicon Valley Bank Collapsed in 48 hours
Last week, the go-to bank for American IT startups abruptly collapsed, placing its influential custom and investors in a precarious situation.
Federal authorities took control of Silicon Valley Bank after it collapsed Friday morning due to an unexpected bank run and capital problem.
It was the biggest failure of a US bank since Washington Mutual in 2008.
Here is what we know about the bank’s collapse and potential future steps.
What is SVB?
SVB, which was founded in 1983, specialized in banking for technology startups. It provided funding for nearly half of venture-backed technology and health-care companies in the United States.
While relatively unknown outside of Silicon Valley, SVB was one of the top 20 American commercial banks at the end of last year, with $209 billion in total assets, according to the FDIC.
How did SVB back Fall?
In short, SVB experienced a classic bank run. The longer version is a little trickier.
Higher interest rates eroded the value of long-term bonds purchased by SVB and other banks during the ultra-low, near-zero interest rate era. The average yield on SVB’s $21 billion bond portfolio was 1.79%; the current 10-year Treasury yield is around 3.9%.
The Federal Reserve, for one, began raising interest rates a year ago to combat inflation after the covid-19 event. It ws an aggressive move, and higher borrowing costs sapped the momentum of tech stocks, which had benefited SVB.
At the same time, venture capital began to stagnate, pushing startups to rely on SVB funds. So the bank was sitting on a glacier of unquantifiable bond losses at the same time that customer withdrawals were increasing.
What was the last straw?
SVB announced on Wednesday that it had sold a number of securities at a loss and that it would also sell $2.25 billion in new shares to shore up its balance sheet. This reportedly created chaos among key investment firms, who notified companies to remove their funds from the bank.
Between Thursday and Friday, 48 hours, trading in SVB shares was halted, and it had relinquished efforts to quickly raise capital or find a buyer. California regulators stepped in, shutting down the bank and placing it under the supervision of the Federal Deposit Insurance Corporation.
SVB may still find a buyer, though this is far from certain.
The FDIC typically sells a failed bank’s assets to other banks, using the proceeds to repay depositors whose funds were not insured.
Source:
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