The fall of Silicon Valley Bank, will project an enormous show wave across the country. The impact will be felt beyond companies that are exposed to the bank. Indeed, to understand the situation, it is important to not underestimate the scale of the bank and current situation situation.
What is Silicon Valley Bank?
Silicon Valley Bank also known as SVB is the nation’s 16th-largest bank in asset. The bank has in total 209 billion in assets at the end of December 31, 2022,, according to the FDIC. In addition, Silicon Valley Bank also hold about $175.4 billion in total deposits. The financial institution was founded in 1983 by Bill Biggerstaff and Robert Medearis in California.
What is special about Silicon Valley Bank?
The bank is well known in the tech industry and in the start up sphere. That is because it served mostly technology workers and venture capital-backed companies. The bank business model was to collect deposits from businesses financed through venture capital. The financial institution provided a much needed capital to a dynamic innovative and dynamic sector. It then expanded into banking and financing venture capitalists themselves, and later added services to allow the bank to keep clients as they matured from their startup phase. Their clients include a combination of well known and unknown brands in the technology, life science/healthcare, private equity/venture capital and premium wine industries.
What caused Silicon Valley Bank collapse?
The failure of Silicon Valley Bank was caused by a combination of multiple factors. But 2 factors stands out ; The U.S. Federal Reserve raising interest rates and a run on the bank.
- Run on the bank
A bank run typically occurs when large groups of depositors withdraw their money from banks simultaneously based on fears that the institution will become insolvent. In the case of SVB, Investors and depositors attempted to pull $42 billion on Thursday March 9th. This was one of the biggest US bank runs in more than a decade, according to a Friday regulatory filing.
This scale of the bank run “caused the bank to be incapable of paying its obligations as they come due,” and it was now insolvent according to the Regulators. The run was ignited by a letter send by the bank CEO to shareholders outlining financial loses and how it plans to raise capital. This immediately prompt shareholders including multiple venture capitalist to encourage their start up to pull their money.
- The U.S. Federal Reserve raising interest rates
The Federal Reserved has been raising interest rates quickly affecting the ability for banks to raise money through Treasury bonds and other mortgage related securities. SVB needed cash to meet the scale of run. Hence, SVB was forced to sell about $21 billion worth of Treasury securities. However, it was at substantial losses. Then SVB turnout said it was issuing shares to raise money and cover those losses. The situation ultimately prompted investors and customers to quickly withdraw all their money.
What is the impact of Silicon Valley Bank collapse?
The impact of the collapse of the Silicon Valley Bank will soon start to emerge but it would well shaken The US economy in the up coming months.
Short term consequence
Companies that have exposure to the bank would immediately start feeling the pain of cash flow. As a result, some companies will cut back on spending or would face difficulties to meet their engagements.
Long term pain for the economy
In the inflationary environment of our current economy things could quickly escalate for the worst. The situation can quickly trigger a new wave of bankruptcy especially for growth tech companies.
The psychological impact
This impact is also not to be neglected as many are wondering not only in The USA but around the world who is next.
