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What does the collapse of Silicon Valley Bank mean for the financial system?

BusinessEconomyWhat does the collapse of Silicon Valley Bank mean for the financial system?
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Teawow ways, Slowly, then suddenly. Thus Silicon Valley Bank (svb), the 16th largest lender in the US with approximately $200 billion in assets, went bankrupt. its financial position spoiled over many years. But just two days passed between the San Francisco-based bank’s announcement on March 8 that it was seeking to raise $2.5 billion to fill a hole in its balance-sheet, and the announcement by the Federal Deposit Insurance Corporation, which protects American banks. controls the deposits, it svb had failed.

svbshare price of fell as much as 60% after the capital raise was disclosed. Its chief executive, Greg Baker, urged customers to “support us as we’ve supported you”. Unaffected, some venture capitalists asked to run the portfolio companies. Hedge-fund manager Bill Ackman suggested that the government should bail out the bank. Its shares had fallen a further 70% or more in pre-market trading by the morning of 10 March, before a halt was called. cnbcA television network reported that svbAttempts to raise capital had failed and the bank was looking to sell itself to a larger institution. Then came the announcement from the regulators.

These incidents raise two questions. the first is how svb Got into this situation. The second is whether its troubles are merely an anomaly, or a harbinger of doom for financial institutions at large.

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Start already. svb There is a bank for startups. It opened accounts for them, often before large lenders would have bothered. It also gave them loans, which other banks are reluctant to do because few startups have assets for collateral. As Silicon Valley boomed over the past five years, so did svb, Its customers were flush with cash. He needed to deposit more money than he could borrow.

Thus svbdeposits more than quadrupled—from $44bn at the end of 2017 to $189bn at the end of 2021—while its loan book grew from just $23bn to $66bn. Since banks make money on the spread between the interest rate (often nothing) paid on deposits and the rate borrowers pay, having a deposit base much larger than the loan book is a problem. svb Other interest-bearing properties need to be acquired. By the end of 2021, the bank had invested $128 billion, mostly in mortgage bonds and Treasuries.

Then the world has changed, As inflation increased, interest rates increased. It ended the bonanza in venture capital and caused bond prices to crash svb specifically exposed. Its deposits swelled when interest rates fell, and its customers were flooded with cash. Since the bank had invested during this time, it bought the bonds at their highest prices. as venture-capital fundraising dried up, svbcustomers reduced their deposits: they fell from $189bn at the end of 2021 to $173bn at the end of 2022. svb was forced to sell its entire liquid bond portfolio at prices lower than what it paid. Losses on these sales, some $1.8bn, left a hole that it sought to fill with capital raising. When it came under the bank held some $91 billion in investments, which were valued at their cost at the end of last year.

Were SVB’Trouble is an anomaly? It appears that the bank is uniquely susceptible to a run. Federal insurance, implemented after a series of panics that toppled the American economy in the 1930s, covers deposits of up to $250,000. It protects all the cash that most individuals would deposit in a bank account. But it is unlikely to cover the funds held by the company. svb A bank is not only for companies but a narrow subdivision of them that has faced the toughest of times. Some 93% of its deposits were not insured. Its customers, unlike those of most banks, had a real incentive to run—and they responded.

That said, almost all banks are sitting on unrealized losses in their bond portfolios. If svb Should the bank have been put in a position to stock up on bonds at their peak prices, it probably isn’t the only one struggling to get prices up. Treasury Secretary Janet Yellen says she is monitoring several banks in light of events in Silicon Valley. Thankfully, loan books make up a large portion of assets at most other institutions. And with rates rising, they’re earning more.

The question now is whether there will be a bail-out and, if so, how big it will need to be to make depositors whole. svb “Tech is the lifeblood of the ecosystem,” says Congressman Ro Khanna from California’s 17th district, which includes part of the valley. “They can’t let the bank fail. Does that mean it should be acquired by another company … or get help from the Treasury Department or even get a statement so depositors Feel safe – I’ll leave it to the experts.

Interference would be unpopular. But due to lack of depositors it may be the only option svb It was clearly not enough to cover the loss of being forced to carry on the property. Former Treasury Secretary Larry Summers has said that as long as the state intervenes, there is no cause for concern. svb Other parts of the financial system will suffer. A lot of people will be hoping that it does, and they’re right.

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