Why US Second Largest Silicon Valley Bank Collapsed ?

The Silicon Valley Bank (SVB) is a financial institution that has played a significant role in supporting the growth of technology and innovation companies in the United States and around the world. on friday it went under with incredible speed. Financial backers are presently tense about whether its end could ignite a more extensive financial implosion.

SVB’s demise continues to reverberate across global financial markets, despite the fact that the federal government of the United States has intervened to guarantee customer deposits. Additionally, the government has guaranteed the deposits of Signature Bank, a regional bank that was on the verge of failure.

US President Joe Biden told Americans on Monday that they “can rest assured that our banking system is safe,” adding that this is a sign of how seriously officials are taking the SVB failure. In addition to all of this, we will do whatever is necessary.

What you need to know about the largest US bank failure since the global financial crisis can found in the following.

Als0 Read : Mystery of the SVB, How Does a Bank Collapse In 48 hours?

Laid out in 1983, Silicon Valley Bank was, not long prior to imploding, America’s sixteenth biggest business bank. Nearly half of all US venture-backed technology and life science companies used its banking services.

Additionally, it operates in Denmark, Germany, Ireland, Israel, Sweden, Canada, China, Denmark, and the United Kingdom.

Due to extremely low borrowing costs and a surge in demand for digital services brought on by the pandemic, SVB greatly benefited from the tech sector’s explosive growth in recent years.

According to financial statements, the bank’s assets, which include loans, more than tripled from $71 billion at the end of 2019 to $220 billion at the end of March 2022. Over the course of that time, as thousands of tech startups parked their cash at the lender, deposits soared from $62 billion to $198 billion. Its global workforce nearly doubled.

After a frantic 48 hours in which customers yanked deposits from the lender in a typical run on the bank, SVB collapsed abruptly.

However, the cause of its demise dates back a few years. SVB invested billions in US government bonds during the time when interest rates were close to zero, like many other banks.

Seemingly a sure thing immediately unhinged, as the Central bank climbed loan costs forcefully to tame expansion.

Since bond prices fall when interest rates rise, SVB’s bond portfolio lost value as a result of the rate increase. According to Reuters, the portfolio’s weekly return of 1.79 percent was significantly lower than the 3.9 percent yield on the 10-year Treasury.

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Tech startups had to put more money toward paying off debt as a result of the Fed’s recent rate hikes raising borrowing costs. They were having trouble obtaining fresh venture capital funding at the same time.

In order to fund their operations and expansion, businesses were compelled to use deposits held by SVB.

Although SVB’s issues can be attributed to its earlier investment decisions, the lender’s announcement on Wednesday that it had sold a number of securities at a loss and would sell $2.25 billion in new shares to close the gap in its finances sparked the run on the bank.

Customers were in a state of panic as a result, and a large number of them withdrew their funds.

As investors began to fear a repeat of the global financial crisis that occurred a decade and a half ago, the bank’s stock dropped by 60% on Thursday and dragged other bank shares with it.

SVB had given up on trying to raise capital or find a buyer by the time Friday morning rolled around. The bank was shut down by California regulators and placed under receivership by the Federal Deposit Insurance Corporation. Receivership typically entails liquidating the bank’s assets to repay depositors and creditors.

Sunday, US regulators announced that they would guarantee the deposits of all SVB customers. The move aims to stop more bank runs and assist tech companies in continuing to pay their employees and fund their operations.

However, investors in the company’s bonds and stock will not be protected because the intervention does not amount to a bailout similar to that of 2008.

In an interview with CBS on Sunday, Treasury Secretary Janet Yellen state, “Let me clear that during the financial crisis, there investors and owners of systemic large banks that on bail out… and the reforms that have put in place mean that not going to do that again.”

In Europe, the benchmark Stoxx Europe 600 Banks record, which tracks 42 major EU and UK banks, fell 5.6% in morning exchange — scoring its greatest fall since last Walk. The troubled Swiss banking giant Credit Suisse’s shares were down 9 percent.

The value of investments in government bonds and other assets held by SVB is not the only financial institution to have experienced a significant decline.

Toward the finish of 2022, US banks perched on $620 billion in undiscovered misfortunes — resources that have diminished in cost yet haven’t sold at this point, as per the FDIC.

The Federal Reserve stated on Sunday that it would provide additional funding to eligible financial institutions in order to prevent the next SVB from collapsing, indicating that regulators are concerned about broader financial chaos.

The majority of analysts point out that banks in the United States and Europe now have much stronger financial buffers than they did during the global financial crisis. Additionally, they point out that SVB was heavily invested in the technology industry, which has been particularly hard hit by rising interest rates.

However, authorities in Europe and the United States are keeping a close eye on the situation.

In a note on Monday, Société Générale macro strategist Kit Juckes stated, “In the age of crises, this is a small one.”

Monday, HSBC intervened and purchased SVB UK for 1.2 pounds, securing the bank deposits of thousands of British tech companies.

The Bank of England would have declared SVB UK bankrupt if no buyer found, leaving customers with only guaranteed deposits of up to £85,000 ($100,000) or £170,000 ($200,000) for joint accounts.

According to Piotr Pisarz, the chief executive officer of Uncapped, a financial technology startup that lends to other startups, the rescue of HSBC is “fantastic news” for the UK startup ecosystem. He told CNN, “I think we can all relax a little bit today.”

The acquisition “strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing firms, including in the technology and life science sectors, in the UK and internationally,” according to HSBC CEO Noel Quinn in a statement.