Silicon Valley Bank (SVB) Downfall
According to the New York Times, there was a massive run on Silicon Valley Bank (SVB), which led to its collapse on Friday, March 10, 2023. This is a summary of what occurred:
- In 2021, money was prominent, cryptocurrency was hot, and tech companies seemed unstoppable.
- Silicon Valley Bank took in approximately $200 billion in deposits during this time.
- Pinterest and Shopify were two of their clients.
- SVB invested a good portion of the $200B in low-interest bonds.
- In 2022, the Federal Reserve raised interest rates dramatically.
- This lowered the value of the bonds SVB invested in.
- This then led to less capital available to startups which were SVB's major customers.
- Because SVB was getting fewer deposits coming in due to the rising interest rates, SVB had to sell the bonds at a steep loss just to cover basic operating costs.
- On March 8th, SVB announced they had sold $21B worth of bonds at a loss of $1.8B.
- This led to a meltdown, and the FDIC had to step in and take control.
Silicon Valley Bank is a well-established financial institution that provides a range of banking and financial services to technology companies, venture capitalists, and private equity firms. It has been operating since 1983 and has a strong reputation for providing financial services to the technology sector.
Here are some of the factors that can lead to the collapse of a bank or financial institution:
- Poor management: Poor management is one of the leading causes of bank failures. Poor managed banks are more likely to engage in risky lending practices, fail to monitor their loans, and make bad investment decisions.
- Asset-liability mismatches: Asset-liability mismatches occur when a bank's assets (such as loans) have a longer maturity than its liabilities (such as deposits). If interest rates rise, the bank may not have enough cash on hand to pay off its short-term liabilities, which can lead to a bank run and collapse.
- Economic downturns: Economic downturns can lead to a rise in loan defaults, which can weaken a bank's balance sheet and lead to its collapse.
- Fraud: Fraudulent activity, such as embezzlement, can lead to a bank's collapse. Banks that do not have strong internal controls or fail to monitor their employees' activities are more vulnerable to fraud.
- Regulatory failure: Regulatory failure can occur when regulatory agencies fail to detect or respond to problems at a bank in a timely manner. This can allow problems to fester and grow until they become too big to resolve.
- Systemic risk: Systemic risk refers to the risk that the failure of one financial institution could lead to a broader financial crisis. If a bank is too interconnected with other financial institutions, its failure could have a ripple effect throughout the financial system.
It is worth noting that the factors that can lead to the collapse of a bank are complex and interrelated. A bank's failure is often the result of a combination of factors rather than any one single factor.
As an investor, it is crucial to be aware of the risks involved in investing in financial institutions. It is also important to do your due diligence before investing in any financial institution and to monitor your investments carefully. This can help you identify potential problems early on and take appropriate action to protect your investments.
A run on a bank occurs when a large number of depositors withdraw their funds from a bank, which can create a liquidity crisis. If the bank does not have enough cash on hand to meet the demand for withdrawals, it may be forced to sell assets at a loss or borrow money at high-interest rates to cover its obligations. This can erode the bank's capital and solvency, further exacerbating the panic among depositors.
While SVB is a well-established bank with a strong reputation, the banking industry is ultimately based on confidence. If a large number of clients were to withdraw their funds suddenly, it could trigger a run on the bank and lead to a loss of confidence among other clients and investors. This could ultimately lead to a liquidity crisis and potentially the failure of the bank.
However, it is important to note that a run on the bank is not necessarily an indication of insolvency. In fact, many banks that have experienced runs were not insolvent or even close to insolvent. Rather, a run on the bank can be triggered by rumors, panic, or a loss of confidence in the bank's ability to meet its obligations.
As a responsible investor, it is important to monitor the health of your investments and be aware of the risks involved in the banking industry. While SVB is a well-established and reputable bank, it is always wise to do your due diligence and carefully monitor your investments. By staying informed and vigilant, you can help mitigate potential risks and protect your investments.
The collapse of Silicon Valley Bank (SVB) is now the largest American bank to fail since Washington Mutual Bank collapsed in 2008.