BANKING CRISIS - PART 2 - Fall of Silicon Valley Bank

What happened to Silicon Valley Bank (SVB)?

On March 10, Silicon Valley Bank, a lender to startups, collapsed due to poor financial decisions, just as slowing venture capital funding prompted fledgling companies to withdraw funds from their accounts . The failure of Silicon Valley Bank marks the biggest bank failure since the 2008 financial crisis. Silicon Valley Bank, a lender to some of the biggest names in the technology industry, collapsed. As a result, almost $175 billion of customer deposits came under the jurisdiction of the Federal Deposit Insurance Corp. Less than 48 hours after Silicon Valley Bank attempted to convince its clients not to withdraw their money due to concerns over a shortage of available funds, the bank was closed by the California Department of Financial Protection and Innovation. The regulator appointed the Federal Deposit Insurance Corp. as the receiver.

Why did Silicon Valley Bank fail?

• The bank's customer base mostly comprised tech-focused startups and companies with deposits exceeding the government's deposit insurance limit, leading to fears of bank failure.
• Despite attempts to raise additional capital, the bank was unable to do so, and regulators seized it due to the run on the bank.
• Silicon Valley Bank accumulated significant funds from prosperous startups and used most of these deposits to purchase bonds over a year ago.
• The bank invested customers' deposits worth billions of dollars in safe bonds, but the value of these investments decreased as they paid lower interest rates than current bonds.
• A drop in funding for startups led to the departure of many of the bank's clients and the withdrawal of their funds, which forced Silicon Valley Bank to sell some of its investments that had decreased in value to fulfill these requests.
• The bank's recent admission of a loss of almost $2 billion came as a surprise.
• The bank's failure is attributed to a common banking issue, despite its reputation for working with high-growth tech companies.

Silicon Valley Bank is the largest failure since the financial crisis, billions stranded (Mar'23)

• SVB Financial, a Silicon Valley-based bank that serves the startup industry, has experienced a sharp decline of over 60% as it raises money to alleviate a financial crunch.
• The bank's stock was halted on Friday morning as concerns arise about a wider banking crisis emerging.
• California banking regulators shut down the bank, and appointed the Federal Deposit Insurance Corporation (FDIC) as the receiver for later disposition of its assets.
• Technology companies such as Roblox and Roku had hundreds of millions of dollars in deposits at the bank, with most of their deposits uninsured, causing their shares to fall.
• The collapse of SVB Financial has sent shockwaves through the startup community, which has come to view the lender as a dependable source of capital.
• The problems at SVB illustrate how the U.S. Federal Reserve and other central banks' campaign to combat inflation by ending the era of cheap money is exposing vulnerabilities in the market.
• U.S. banks have lost over $100 billion in stock market value over the past two days, with European banks losing around another $50 billion in value, according to a Reuters calculation.
• The genesis of SVB's collapse lies in a rising interest rate environment. As higher interest rates caused the market for initial public offerings to shut down for many startups and made private fundraising more costly, some SVB clients started pulling money out.
• SVB sold a $21 billion bond portfolio consisting mostly of U.S. Treasuries on Wednesday and said it would sell $2.25 billion in common equity and preferred convertible stock to fill its funding hole.
• Its collapsing stock price made its capital raise untenable, and sources said the bank attempted to explore other options, including a sale, until regulators intervened and closed the bank.

Update (April'23) :

• First Citizen Bank buys SVB - First Citizens will purchase $72 billion worth of assets from the bank for a discounted price of just $16.5 billion.
• SVB Financial stock experienced a decline of over 99%, got halted and delisted for 3 weeks straight and is now trading again as a penny stock with a market cap of <25M.

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