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Decoding: Silicon Valley Bank Crisis

Decoding: Silicon Valley Bank Crisis

Silicon Valley Bank: What is it?

Silicon Valley Bank, which was founded in 1983, ranked as America’s 16th-largest private bank. Nearly half of all US venture-backed technology and life science firms received banking services from it.

It also conducts business in the following countries: Canada, China, Denmark, Germany, Ireland, Israel, Sweden, and the UK.

What caused it to fall?

After a hectic 48 hours in which customers frantically withdrew savings from the lender in a traditional run on the bank, SVB abruptly collapsed. However, the cause of its downfall has been brewing for a while. During the period of almost zero interest rates, SVB invested billions in US government bonds, just like many other institutions.

As the Federal Reserve aggressively increased interest rates to control inflation, what initially appeared to be a safe bet soon unraveled.

Bond prices decline as interest rates rise, so the increase in rates reduced the worth of SVB’s bond portfolio. According to Reuters, the portfolio’s average return last week was only 1.79%, considerably lower than the 3.9% yield on the 10-year Treasury.

The Fed’s rate-hiking binge also increased borrowing costs, forcing tech startups to allocate more money to loan repayment. They were having trouble finding new venture capital financing at the same time.

As a result, businesses were compelled to use deposits kept by SVB to pay for operations and expansion.

How about speculators and depositors?

The deposits of all SVB clients will be guaranteed, US regulators announced on Sunday. The move is intended at preventing more bank runs and enabling tech companies to continue paying staff and funding their operations.

Will a banking catastrophe result from this?

There are already some indications of stress at other banks. After the shares of First Republic Bank (FRC) and PacWest Bancorp (PACW) fell 65% and 52%, respectively, trading in those stocks was momentarily suspended. At 11.30 a.m. ET on Monday, shares of Charles Schwab (SCHW) were down 7%.

The benchmark Stoxx Europe 600 Banks index in Europe, which monitors 42 significant EU and UK banks, dropped 5.6% in early trade, marking the largest decline since last March. The troubled Swiss financial behemoth Credit Suisse saw a 9% decline in share price. Government bond and other asset purchases made by SVB and other financial institutions have seen significant value declines.

In Indian context there will be no major impact on banking systems although it may affect  start-ups  in the short term when it comes to funding & making payroll.

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