On March 10, 2023, Silicon Valley Bank (SVB) went out of business. This was the second-largest bank failure in US history. The bank, which was 39 years old, was raided by regulators less than 48 hours after it announced a capital boost that led to its bankruptcy. What went wrong with SVB, and how can it be fixed? Reuters sources say that the bankruptcy could be linked to SVB’s announcement on March 8. The whole thing started the week of March 3, when Moody warned SVB of a downgrade, revealing burned fast lessons from the fastest startup collapses.
SVB sold $21 billion worth of available-for-sale securities on March 8 in order to improve its financial situation. It lost $1.8 billion in the process since it didn’t want to face a multi-notch downgrade. The company’s stock price fell by more than 60% on March 9. Venture capitalists and other startups were shocked by the capital raise and the uncertainty. They told the companies in their portfolio to withdraw their money out of SVB.
People who had money in SVB wanted to take out $42 billion in one day
March 10, 2000: The stock was stopped on Friday because it had dropped 60% before the market started. Later that day, California regulators shut down SVB and named the Federal Deposit Insurance Corporation (FDIC) as the receiver. This effectively ended what had been the 16th largest bank in the United States. SVB’s key customers were start-ups and venture capital funds that worked in the technology industry. On the one hand, the influx of cash into new businesses and huge deposits into SVB went hand in hand with very low interest rates, stimulus programs, easy access to cash, and almost frenzied investor excitement that drove prices further higher in 2021.
SVB put this extra money into Treasury bonds, which were paying them roughly 2% a year at the time. Interest in startups has dropped, and their values have dropped, which has caused venture capital investments to fall. The bank had to sell the investment assets it had in order to get cash to deal with the outflows. Unfortunately, interest rates have been going up quickly over the past year, and the bank didn’t change its policies to reflect the new information regarding interest rates. since of this, SVB had to sell its investment since it was losing money, which meant it had to raise capital, which made its clients lose trust and led to the bank run.
SVB couldn’t control risks since it didn’t have enough different kinds of clients
The Federal Reserve said that interest rates will be much higher in 2022, but SVB had not yet closed in on the changing levels of interest rates. In fact, SVB didn’t have a Chief Risk Officer from April 29, 2022, to January 3, 2023. But one concern that might come up is why this vital job didn’t have someone working in it for more than eight months, when interest rates were changing more than they had in decades.
The SVB bankruptcy illustrates that businesses should think about having a wider range of clients and carefully assess how changes in the economy will affect them.
Because interest rates are so unstable right now, corporations should regularly check how sensitive their interest rates are and do stress tests in case interest rates stay high longer than expected. Also, they should create strategies for what to do if there is a recession. Investors should be worried about the risk of contagion as well as the failure of this bank. They should also be worried about the liquidity and risk management of other institutions. High interest rates, a diminishing business, and clients’ changing attitudes towards a bank can all cause a tidal wave.
Warren Buffet said that you only find out who was swimming naked when the tide goes out
The savings and loans went out of business in the 1990s, and the economy fell apart in 2008. It all started with a few poorly run stores that had a ripple effect on the whole economy. Reports of problems at Credit Suisse suggest that other banks may also fail when SVB goes under. The U.S. government’s quick action to protect depositors for an indefinite period of time may, however, stop a run on the banks from evolving into a run on the financial institutions. There is little question that the failure of SVB will keep the tech industry in the bad shape it is now. After a crazy 2021 when tech stocks reached record highs, they fell in 2022 and were replaced with widespread layoffs.
A technological company that needs money doesn’t have to have a sound business model and be making money anymore. One good thing that could come out of this failure is that it could show how bad risk management can be, and it could serve as a lesson for others. This would make investors more cautious and focused on quality investments, which would help the economy slow down, which is what central banks are trying to achieve by raising interest rates. On March 10, 2023, Silicon Valley Bank (SVB) went out of business.
Conclusion
This was the second-largest bank failure in US history. The bank, which was 39 years old, was raided by regulators less than 48 hours after it announced a capital boost that led to its bankruptcy. What went wrong with SVB, and how can it be fixed? Reuters sources say that the bankruptcy could be linked to SVB’s announcement on March 8. The whole thing started the week of March 3, when the rating agency Moody told SVB that the bank will be downgraded. SVB sold $21 billion worth of available-for-sale securities on March 8 in order to improve its financial situation.
It lost $1.8 billion in the process since it didn’t want to face a multi-notch downgrade. The bank said on March 8, which was also a holiday, that they would sell equities to make up for this loss. The company’s stock price fell by more than 60% on March 9. Venture capitalists and other startups were shocked by the capital raise and the uncertainty. They told the companies in their portfolio to withdraw their money out of SVB. People who had money in SVB wanted to take out $42 billion in one day. March 10, 2000: The stock was stopped on Friday because it had dropped 60% before the market started. Later that day, California regulators shut down SVB and named the Federal Deposit Insurance Corporation (FDIC) as the receiver.
