Decoding the Silicon Valley crisis in 5 simple points

The Silicon Valley bank was shut down by US regulators last week.

New Delhi:

The collapse of Silicon Valley Bank and Signature Bank within a week has raised fears of a major financial meltdown among regional US banks. These are the three biggest failures in US banking history with the collapse of Washington Mutual in 2008 taking the top spot. The collapse of Washington Mutual led to a global recession that lasted for nearly two years.

NDTV explains the Silicon Valley crisis in 5 points

what is silicon valley bank

Silicon Valley Bank, established in 1983, was the 16th largest bank in the US. Before its collapse, it provided services to nearly half of the venture-backed technology companies in the US.

The bank has benefited from the rapid growth of the technology industry in recent years.

The bank’s assets, which include loans, are set to more than triple from $71 billion at the end of 2019 to a peak of $220 billion at the end of March 2022, according to financial statements.

What went wrong with Silicon Valley Bank

The short answer is Silicon Valley Bank didn’t have enough cash to pay depositors so California regulators shut the bank down.

The bank’s problems can be traced to its investment decisions once it has accumulated funds. SVB invested most of its deposits in government bonds when interest rates were extremely low.

Bonds are considered a safe investment, an idea that worked well until the Federal Reserve started raising interest rates last year to try to tame inflation. Bond prices fall when interest rates rise.

In order to honor customers’ withdrawal requests, the bank was forced to sell some of its investments, despite a fall in value.

SVB recently said it lost $1.8 billion on the sale of some of those securities and was unable to raise funds to cover the losses. These announcements caused panic among their investors and its stock fell 60%.

On March 10, California regulators seized the bank and put the Federal Deposit Insurance Corporation in charge of all deposits.

How the US government is handling the crisis

About $175 billion in Silicon Valley bank deposits are now under the control of the Federal Deposit Insurance Corporation, or FDIC. All the properties of SVB have been put up for auction. Recently, the UK branch of the bank was bought by HSBC for a mere £1.

The Federal Reserve has also announced plans for a “thorough, transparent and swift” review of SVB’s supervision that will be publicly released on May 1, effectively admitting that it could have done better.

President Joe Biden promised a “full accounting of what happened”, adding that he would ask regulators and banking regulators to tighten rules on the sector. He also rejected the bailout package, saying that taxpayers’ money would not be responsible for the losses from the failed bank.

What Silicon Valley customers can do now

The head of Silicon Valley Bridge Bank, created by US regulators to succeed Silicon Valley Bank, has urged depositors to return their money, as big banks see an inflow of funds.

“The number one thing you can do to support the future of this institution is to help us rebuild our deposit base,” Chief Executive Tim Mayopoulos said in a statement. in the last several days.

The FDIC has repeatedly stated that it will cover all SVB depositors, including beyond the general limit of $250,000 for FDIC protection.

what next

Banking experts are among those concerned about the rapid decline of Silicon Valley Bank and Signature Bank. The demise has hit banking stocks around the world.

Experts say that the markets may continue to decline in the near future.

“I think all markets are in for volatile times in the short term,” says Ilya Volkov. The fear is justified – given that this is the biggest US bank failure since the 2008 crisis. But I don’t think it will last long. Will last.” , co-founder of YouHodler, a Swiss-based international fintech platform.

Mr. Volkov also said that the closure of SVB could have a domino effect on other US banks.

“The Silicon Valley bank could have a domino effect on other US regional banks. We can already see shares of these smaller banks tumbling as people sell fear-based news,” he said.

Rate this post

Leave a Comment