Silicon Valley Crisis Explained In 5 Simple Points

Silicon Valley Bank was closed by US regulators last week.

New Delhi:

The collapse of Silicon Valley Bank and Signature Bank within a week has stoked fears of a larger financial meltdown across regional US banks. The failures are two of the three biggest in US banking history, with the collapse of Washington Mutual in 2008 occupying the top spot. The fall of Washington Mutual led to a global recession, which lasted for nearly two years.

NDTV explains the Silicon Valley Crisis in 5 points

What Is The Silicon Valley Bank

Silicon Valley Bank, established in 1983, was the 16th biggest bank in America. Before collapsing, it used to provide services to nearly half of the venture-backed technology companies in the US.

The bank benefited from the tech industry’s rapid growth in recent years.

The bank’s assets, which include loans, more than tripled 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 At Silicon Valley Bank

The short answer is Silicon Valley Bank did not have enough cash to pay depositors so California regulators closed the bank.

The bank’s problems can be traced back to its investment decisions after it amassed a fortune. SVB invested most of its deposits in government bonds when the interest rates were extremely low.

With bonds considered a safe investment, the idea worked well until the Federal Reserve began hiking interest rates last year to cool inflation. Bond prices fall when interest rates go up.

To honour customers’ withdrawal requests, the bank was forced to sell some of its investments despite the plunge in value.

SVB recently said it took a $1.8 billion hit on the sale of some of those securities and they were unable to raise money to offset the loss. These announcements created a 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 the deposits.

How The US Government is Handling The Crisis

Nearly $175 billion of Silicon Valley Bank’s deposits are now under the control of the Federal Deposit Insurance Corporation, or FDIC. All of SVB’s assets have been put up for auction. Recently, the UK arm of the bank was bought by HSBC for a measly sum of 1 pound.

The Federal Reserve has also announced plans for a “thorough, transparent, and swift” review of the supervision of SVB that will be publicly released on May 1, effectively acknowledging 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 ruled out a bailout package saying that taxpayers’ money will not be responsible for losses from the failed bank.

What Can Silicon Valley Customers Do Now

The head of Silicon Valley Bridge Bank, created by US regulators to succeed Silicon Valley Bank, has urged fleeing depositors to return with their money, as large banks see an influx 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, “both by leaving deposits with Silicon Valley Bridge Bank and transferring back deposits that left over the last several days.

The FDIC has repeatedly said it will cover all SVB depositors, including beyond the usual cap of $250,000 for FDIC protection.

What Next

Banking experts have been among those alarmed at the rapid collapse of Silicon Valley Bank and Signature Bank. The demise has hit banking stocks around the globe.

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

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

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

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

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