Did you hear about the Silicon Valley Bank (SVB) collapse? Did you also have flashbacks to the 2008 crisis and felt the panic reaching your brain before you understand what the hell is going on? Take a deep breath, and let me spill the Silicon tea!
Yes, Silicon Valley, the tech capital has its own bank which is largely there to support tech companies, startups or not. It had their back until it broke! So, what happened? First, we need to go back to the beginning.
SVB is the USA’s 16th largest commercial bank, at least it was. It provided banking services to nearly half of all US venture-backed technology and life science companies. That means that when the pandemic hit, it won big time! Like many tech companies, they used SVB to hold their cash for payroll and other business expenses. This led to an influx of deposits. Like many banks, SVB invested these deposits in mortgage-backed securities (MBS), one of the safest forms of investment... supposedly!
The downfall of SVB
The thing is that SVB didn’t think ahead or look at the overall picture when making such investments. The world economy as a whole is still struggling to recover from the pandemic and so the US Federal Reserve (America’s version of the CBE) kept on rising the interest rates to curb inflation.
This is exactly why the bonds have lost their value. Because when interest rates rise, bond prices fall. So, when the Federal Reserve started to continuously increase rates, SVB’s bond portfolio started to lose significant value.
Now because of the deteriorating economy, many tech companies started to draw their deposits. Yes, the same deposits that SVB invested in bonds. SVB didn’t have any choice but to sell its bonds at low prices. Thus, it lost its investment and everyone started to freak out.
Chaos ensues
That one action caused panic across social media and people gaslit others into withdrawing their money from the bank. That’s what happened and that’s how SVB collapsed. The more people took their money, the less money SVB will have and so it won’t be able to give back everyone’s money. That’s a bank run!
On March 10, $42 billion went out of SVB making it the second-largest bank failure in the US financial history after the Washington Mutual run-on during the 2008 financial crisis.
The consequences of greed are always the same and SVB seem to have fallen into the trap. By pursuing higher yields, it made itself vulnerable to deposit withdrawals and fluctuating interest rates.
