Silicon Valley Bank Collapses: Could Mean Big Changes for the Banking Industry

SVB experienced an unexpected, abrupt collapse after a two day period in which customers withdrew their deposits in what is termed as a “bank run.”

The roots of SVB’s demise can be traced back to the Federal Reserve’s recent tightening of monetary policy. With their aggressive interest rate hikes, investors have had to pay more when borrowing money. This in turn has increased the burden on tech start-ups who struggle to raise new venture capital funding, and as a result are relying more heavily on deposits held by SVB. These economic factors coupled with rising rates causing a decrease in bond portfolio yields—which were averaging 1.79% last week compared to the 10-year Treasury yield of around 3.9%, according to Reuters—contributed significantly towards the closure of this well-known business.

Several years ago, SVB decided to allocate billions of dollars into US government bonds in an attempt to make money from the near-zero interest rate environment. However, when the Federal Reserve raised rates aggressively in order to tame inflation, this bet backfired. As a result, the value of their bond portfolio dropped and the yield fell below the 10-year Treasury yield. Further compounding the damage done was that startups had to pay higher borrowing costs, resulting in them drawing down on deposits held with SVB for funding operations and growth.