Silicon Valley Bank, Why did it collapse?
SBV, Silicon Valley Bank is a financial institution that provides a range of banking and financial services to technology and life science companies, venture capitalists, and private equity firms. It was founded in 1983 and is headquartered in Santa Clara, California.
SVB provides different types of banking services, including commercial banking, investment banking, and private banking. It also offers financing solutions such as debt financing, equity financing, and asset-based lending to help its clients to grow the businesses.
Besides banking services, SVB also provides a number of resources and educational programs for new people who want to start their business, including its Startup Insights blog and the SVB Innovators Card, which offers rewards and benefits tailored to new companies.
Silicon Valley Bank is known for its focus on the innovation sector and has become a prominent player in the startup and venture capital ecosystems. The bank has offices in several locations throughout the United States, as well as international offices in the United Kingdom, Ireland, Israel, China, and other countries. The bank has an office in Bengaluru’s Manyata Embassy Business Park. (India)
The bank has a strong network of clients, which includes some of the most successful and innovative companies in the tech and life science industries, as well as venture capitalists and private equity firms. SVB also provides its customers access to its network of industry experts, providing valuable insights and connections to help startups to become saucerful.
Overall, Silicon Valley Bank was an important player in the tech and life science industries and was widely respected for its expertise and commitment to innovation and entrepreneurship.
But a news came, Silicon Valley Bank has collapsed in March 2023. Investors are now on edge about whether its demise could spark a broader banking meltdown.
The US federal government has stepped in to guarantee customer deposits, but SVB’s downfall continues to reverberate across global financial markets. The government has also shut down Signature Bank, a regional bank that was teetering on the brink of collapse, and guaranteed its deposits.
In a sign of how seriously officials are taking the SVB failure, US President Joe Biden told Americans that they “can rest assured that our banking system is safe,” adding: “We will do whatever is needed on top of all this.”
Why did it collapse?
SVB’s collapse came suddenly, following a frenetic 48 hours during which customers yanked deposits from the lender in a classic run on the bank.
But the root of its demise goes back several years. Like many other banks, SVB ploughed billions into US government bonds during the era of near-zero interest rates.
What seemed like a safe bet quickly came unstuck, as the Federal Reserve hiked interest rates aggressively to tame inflation.
When interest rates rise, bond prices fall, so the jump in rates eroded the value of SVB’s bond portfolio. The portfolio was yielding an average 1.79% return last week, far below the 10-year Treasury yield of around 3.9%, Reuters reported.
At the same time, the Fed’s hiking spree sent borrowing costs higher, meaning tech startups had to channel more cash towards repaying debt. At the same time, they were struggling to raise new venture capital funding.
That forced companies to draw down on deposits held by SVB to fund their operations and growth.
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