On Friday, the Silicon Valley Bank declared bankruptcy and was closed by federal authorities. We are talking about the biggest bank failure since the US crisis of 2008.
This article will go into detail about the reasons why a bank of such great value had to close its doors.
Summary
What was Silicon Valley Bank and why it declared bankruptcy
Silicon Valley Bank (SVB) was a specialised bank providing financing and banking services to technology and innovation companies.
Founded in 1983 in Santa Clara, California, SVB grew into a global financial institution with offices in several countries, including the United States, the United Kingdom, China and Israel.
Its mission was mostly to help innovative companies grow and succeed by providing them with tailor-made financial solutions and expert advice.
SVB is unique in that it focuses exclusively on the needs of technology and innovative companies. Its clients include venture capital companies, private equity firms, start-ups and public companies in various sectors such as software, hardware, cleantech, life sciences and healthcare.
Silicon Valley Bank financial services include commercial banking, investment banking, asset management and private banking.
SVB’s commitment to supporting the technology and innovation sector has made it a trusted partner for many of the world’s most innovative companies.
Silicon Valley Bank foundamental for the tech company
SVB has played a key role in the growth and success of companies such as Google, Yahoo! and LinkedIn, and continues to be a leading provider of financial services to the technology and innovation sector.
Silicon Valley Bank, rich in funding from start-ups, followed the strategy of most of its competitors: it allocated a small portion of its deposits to cash and used the rest to purchase long-term debt such as Treasury bonds, which promised a steady and modest return during periods of low interest rates.
However, this strategy turned out to be short-sighted as the bank did not take into account the performance of the economy in general, which overheated due to the pandemic stimulus that had been provided for over a year.
Initial Trouble
When the Federal Reserve began raising interest rates to counter rapid inflation, Silicon Valley Bank found itself in trouble. Its investments, once considered safe, became less attractive in comparison to new government bonds that offered higher interest rates.
In addition, funding for start-ups was declining, causing the bank’s customers, consisting of technology start-ups and their executives, to withdraw their funds.
This would have caused problems for the bank, which would have had to sell some of its investments at steep discounts to meet the demands of its customers.
Not all the problems that led to the rapid demise of the Silicon Valley Bank were caused by rising interest rates. The bank was different from the others in ways that contributed to its downfall.
The Federal Deposit Insurance Corporation (FDIC) only insures up to $250,000, so deposits above this amount do not enjoy the same government protection. Silicon Valley Bank had a large number of large uninsured depositors, who used to withdraw their money during periods of financial turmoil.
After the revelation of the huge loss suffered by Silicon Valley Bank last Wednesday, the entire technology industry was shaken by panic and start-ups tried to withdraw their funds.
What does the bank’s failure mean for the financial sector?
Silicon Valley Bank is much smaller than the country’s largest banks: its $209 billion in assets is far less than JPMorgan Chase’s more than $3 trillion.
However, bank runs can occur when customers or investors start withdrawing their deposits due to panic. The most immediate concern at the end of this week was that the failure of Silicon Valley Bank might scare away customers of other banks.
At the moment, no domino effect has yet been created among banks, but the shares of major banks such as First Republic Bank (San Francisco) and Signature Bank (New York) have fallen by more than 20%. While other major banks even recorded increases.
The failure of SVB was caused by circumstances specific to that bank and may not be a prelude to other failures.
Other banks are much more diversified across multiple sectors, customer bases and geographic areas. The most recent round of ‘stress tests’ by the Federal Reserve of the largest banks and financial institutions showed that all would survive a deep recession and a significant drop in unemployment.
However, the bank’s closure is creating significant stress for the companies that had deposits with it.
Understanding the implications of SVB’s failure and mitigating the stress and disruption for other companies that had funds deposited with it may be the most significant aspect of this situation.
How will the collapse of the SVB bank affect the crypto ecosystem?
The recent failure of the Silicon Valley Bank has caused tremors throughout the financial world. The collapse could also have far-reaching consequences for the emerging cryptocurrency world.
One potential effect of the bank’s failure is a much tighter control of the cryptocurrency sector by regulators.
SVB was an important player in the fintech space, and its demise could prompt regulators to take a closer look at the often unregulated world of cryptocurrencies.
Another potential impact of SVB’s collapse is the loss of investor confidence in the cryptocurrency sector. Many cryptocurrency startups relied on SVB for funding, and the bank’s failure could cause investors to become more cautious about investing in the sector.
This could lead to a slowdown in the growth of the cryptocurrency sector as startups struggle to obtain funding.
However, some experts believe that the failure of SVB could ultimately be positive for the cryptocurrency sector.
The collapse of a major fintech player like SVB could be seen as a wake-up call for investors and start-ups in the sector, who may have become complacent in the face of a long period of growth and optimism.
The failure could lead to a renewed focus on risk management and responsible investment practices, which could ultimately lead to a more sustainable and stable cryptocurrency ecosystem.
