In this post, I try to understand the collapse of the Silicon Valley Bank, since this is a historical event. Answers are generated by Bing with minimal editing on my part.
What caused the Silicon Valley Bank to collapse?
SVB failed on March 10, 2023, after a bank run and a capital crisis. It was taken over by federal regulators. It was the largest bank failure since 2008.
What is a bank run?
A bank run is when many customers withdraw their money from a bank at the same time because they fear that the bank might fail. This can make the bank insolvent and unable to pay back its depositors.
How did the rise in interest rates cause depositors to withdraw their money?
SVB was vulnerable to a rise in interest rates because it had invested heavily in tech stocks and bonds that lose value when rates go up. When the Federal Reserve announced a rate hike on March 9, 2023, investors panicked and sold off SVB shares, causing its stock price to plummet. This triggered a loss of confidence among depositors who rushed to withdraw their money before the bank ran out of cash.
Why did SVB make a massive loss of US$1.8 billion on its investments?
SVB made a massive loss of US$1.8 billion on its investments because it had to sell a large portion of its bond portfolio at a lower price than it bought them. This was because SVB needed to raise cash quickly to meet the demands of depositors who were withdrawing their money. The bond prices had fallen due to higher interest rates.
Why do bond prices fall when interest rates rise?
Bond prices fall when interest rates rise because bonds pay a fixed amount of interest that becomes less attractive when new bonds offer higher interest rates. This lowers the demand for existing bonds and reduces their market value.
What is the impact of the SVB collapse on other companies?
The impact of the SVB collapse on other companies is still uncertain, but some possible effects are:
- Some Chinese firms that have business ties with SVB said they have seen limited impact so far, but some analysts warned about global risks
- Some Israeli tech companies that relied on SVB for funding and banking services may face difficulties or losses
- Some U.S. tech stocks and bonds may lose value as investors lose confidence in the sector
What are the companies that deposited the most money in SVB?
The exact list of companies that deposited the most money in SVB is not publicly available, but some of them are:
- Roku, which said it has nearly $500 million with SVB
- Roblox, which said it has about $300 million with SVB
- Nazara Technologies, which said its two subsidiaries hold cash worth $8.7 million in SVB
These companies are among the 90% of SVB's depositors who have more than $250,000 with SVB and are not fully insured by the FDIC.
Without access to their deposits, these companies are unable to pay their employees!
What are the banks that experienced a bank run in the 2008 financial crisis?
One of the banks that experienced a bank run in the 2008 financial crisis was Washington Mutual, which collapsed in September 2008 and was acquired by JPMorgan Chase. Another bank that faced a bank run was Northern Rock in the UK, which was nationalized by the British government in February 2008.
However, the most recent bank failure is Silicon Valley Bank. This is the largest failure of a financial institution since Washington Mutual more than a decade ago.
References
https://www.businesstimes.com.sg/companies-markets/how-bank-run-closed-svb-and-where-could-lead
