Silicon Valley Bank (SVB) collapsed on Friday, 10th March 2023 and it created the second-largest bank failure in US history; Washington Mutual (WaMu) collapse in 2008 was the largest bank failure in US history. So what caused the Silicon Valley Bank to collapse? even as the bank grew to be the 16th largest in America.
What caused the Silicon Valley Bank to collapse?
Silicon Valley Bank collapsed on 10th March 2023 because it was short of cash to pay its customers; the withdrawal rate of SVB’s customers increased as a result of the economic tightening brought about by the increase in interest rates by the Feds. This increase in interest rates by the Federal Reserve made borrowing difficult for businesses and individuals as well.
The majority of the customers of Silicon Valley Bank were tech companies that profited heavily during the COVID-19 pandemic by providing delivery services and entertainment to people during the lockdown. As Silicon Valley Bank saw an influx of deposits as a result of its customers profiting during the pandemic, it took the money and invested in long-term government bonds which are safe investments; but the collapse of the silicon valley bank happened when the bank was forced to sell these bonds at a huge loss to meet the growing demands of these tech companies that now wanted to withdraw their funds (which were already invested in the long-term bonds).
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What triggered SVB collapse?
Things worsened for Silicon Valley Bank when the bank announced on Wednesday, 8th March 2023 that it had a loss of $1.8 billion after-tax. The bank now needs to raise more capital in order to pacify its depositors (customers). Because of the economic tightening currently ongoing as the Feds kept raising the interest rates to curb the inflation rate, SVB was unable to get any funding and since the announcement of the loss of $1.8 billion after-tax on the 8th of March, 2023; things became worse as other customers were panicky and tried to withdraw their funds from the bank which already had no more cash even after selling its bonds at a huge loss.
It only became worse for Silicon Valley Bank after it declared a loss of 1.8 billion dollars as the stock market reacted, investors in SVB stocks started selling their stocks which caused a further loss of more than $160 billion dollars within 24 hours.
To prevent the ripple effect of the SVB collapse from affecting the U.S economy and other banks in the United States and also ensure that depositors (customers) are able to recover their money, Silicon Valley Bank was taken over by the Federal Deposit Insurance Corporation (FDIC) on Friday, 10th of March, 2023.
The FDIC said Silicon Valley Bank had $209 billion in assets and $175.4 billion in deposits at the time of the collapse.
Prior to the FDIC stepping in, depositors could only access up to $250,000, the insurance limit for their accounts. This is far less than the amount that many tech companies (such as Roblox, Etsy, etc.) have in their accounts. After the takeover, the FDIC is making a possible way for customers to recover all their funds.
The FDIC will retain all the assets from Silicon Valley Bank for later disposition.
Video: What caused the Silicon Valley Bank to collapse?
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