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Silicon Valley Bank collapsed on March 10, 2023. It was the 16th largest bank in the United States, and its collapse was the second largest in history. The only larger bank to collapse was Washington Mutual on September 26, 2008.
Here is what you need to know:
Silicon Valley Bank, or SVB, traded on NASDAQ under the stock ticker $SIVB. It was based in Santa Clara, California and was founded in 1983 (39 years ago) by former Bank of America (NYSE:BAC) executives managers Bill Biggerstaff and Robert Medearis to focus on the needs of startup companies.
Along with the Silicon Valley startup scene it achieved strong growth in the 1980s and had a history of ups and downs in concert with the economy it serviced.
It was home to approximately half of all venture-backed startups. It had 8,553 employees.
Big banks JP Morgan and PNC Bank are now among those vying for SVB’s remaining assets.
Stock analysts like TV personality Jim Cramer recently touted SVB stock as a “buy”.
He was not alone.
In 2022 Forbes named SVB one of America’s Best Banks, and Moody’s gave them an A rating.
SVB received a lot of deposits from startups. Its deposits tripled from 2018 to 2021. Investors gave millions to startups, and those startups deposited it at SVB. Now the bank had all this customer cash and needed to do something with it.
In traditional banking, the bank take deposits and make loans. The interest generated from these loans is how banks make a profit. But their customers, startups, didn’t need many loans, because investors kept giving them money.
So instead of making loans, SVB took these deposits and invested them in what was considered a much safer investment. They bought bonds.
They took around $80 billion in customer deposits (checking & corporate payroll accounts) and used them to buy US government bonds. SVB was betting that the Fed would hike interest rates slowly, but in 2022 the Fed hiked rates faster than SVB planned.
With every rate hike, the $80 billion SVB had locked up looked progressively worse. Bonds were losing value, which happens when interest rates go up.
No one wants to buy bonds yielding 1.5% when the current market is selling bonds with a yield of 5%. When interest rates go up, Banks pay more interest on deposits.
Moody’s issued a warning of a possible downgrade to SVB’s credit rating and this could cause investors and depositors to lose confidence in the bank. To avoid this, SVB sold its bond portfolio at a $2 billion loss to raise money, creating FUD, which stands for fear, uncertainty, doubt.
Its stock tanked over 60% Thursday, March 9, 2023. As a result many VC funds advised their companies to pull their deposits, which turned into a run on the bank. A bank run occurs when a large number of depositors withdraw their deposits simultaneously because they have lost confidence in a bank.
Customers can access their funds anytime, but it’s unlikely that every single customer would request their funds all at once This is why banks typically only maintain a fraction of their funds, at least 10%, and then lend out the remaining deposits.
This is called “Fractional Reserve Banking”.
Fractional reserve banking is a system where banks hold only a fraction of customers’ deposits in a reserve, while the rest is used to make loans or investments But it can create a bank run if too many want their funds at once. The bank won’t have enough for all the withdrawals.
NASDAQ halted $SIVB stock trading on Friday, March 10 after falling over 60% in premarket trading, as news emerged that the bank wanted to sell itself.
$SIVB went from trading over $700 in October 2021 to below $50.
SVB paid out annual bonuses hours before its collapse. Over the last two weeks, Silicon Valley Bank executives sold millions worth of their shares:
Regulators and even the President of the United States have promised rapid action to prevent contagion.
Unless contained, this could be brutal.
Garry Tan, President & CEO of Startup Incubator YCombinator has said
“This is an extinction-level event for startups and will set startups and innovation back by 10 years or more.”
Here are some of the better known companies who bank with SVB:
The FDIC insures deposits up to $250,000, making less than 5% of SVB’s $175 billion of deposits, and less than 5% of SVB’s customers fully FDIC insured.
Customers of the uninsured portion receive “a receivership certificate” (an IOU for any funds recovered).
Their fate will be dependent on how the bank’s assets are dealt with and what plans regulators approve.
This content was originally published here.
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