By JTFMax:
Silicon Valley Bank was a crucial financial conduit between startups and venture capital firms. It was also a significant funding source for many tech companies that went public last year.
It was a classic run on a bank.
As VC fundraising waned, the bank’s clients started pulling money out of their accounts faster than it could scrounge enough deposits to cover them. That left the bank with a deficit, and California regulators took over the Santa Clara, Calif.-based lender on Friday.
The crash of Silicon valley bank is one of the biggest bank failures since 2008. This will cause much contagion and almost certainly more bank failures.
Silicon Valley Bank was the 16th largest lender in the USA, with around $200 billion in assets. As a result, it was susceptible to the boom-and-bust cycles of the tech industry.
A significant reason that Silicon Valley Bank collapsed was that its bonds lost value, making them less attractive to investors. This was caused by the Federal Reserve raising interest rates.
In response, many of its customers shifted their money elsewhere. That led to a run, which doomed the bank’s plans to raise capital and find a buyer.
The failure of SVB is causing financial turmoil for startups, many of whom rely on the bank to process checks and payments. For example, Shelf Engine, a 40-person startup that helps grocery stores reduce food waste, relies on SVB for much of its cash.
It was a mismatch of assets and liabilities.
The bank was a resource for tech companies, startups, and venture capitalists. They deposited massive amounts of cash raised through IPOs, SPACs, and other equity funding into accounts at the bank.
But as interest rates climbed last year, many startup investors started pulling cash out. Silicon Valley Bank, which invested much of that money in bonds, then lost a fortune as its investments declined.
As a result, SVB had a colossal mismatch of assets and liabilities. It had plenty of cash, but more was needed to cover its liabilities and keep the bank afloat.
As a result, the Federal Deposit Insurance Corporation had to take over the bank. The agency has said it will pay out up to $250,000 in deposit insurance coverage on Monday and may make future dividend payments to uninsured deposits. This will help protect investors and customers.
Immigrant entrepreneurs
While it’s safe to assume that the SVB debacle will hard-hit the tech sector, the impact could be far more significant for immigrants and their businesses. According to the Bureau of Labor Statistics, more than 44% of tech companies are started by immigrants, and nearly 70% of tech workers were born elsewhere. Considering the number of foreign-born individuals in the US, it’s no wonder that the tech industry is so lucrative. While it may be too early to tell what impact the SVB meltdown will have on the larger banks in the USA, it’s not too farfetched to speculate that smaller institutions will get the heave-ho. The competition for retail deposits from T-bills and MMFs will significantly hurt the small fry. The best way to mitigate the potential risk is to diversify your banking portfolio and avoid any bank with a dubious reputation.
Smaller banks
The crash of Silicon valley bank has sent investors rushing to audit the rest of the US banking sector, which layoffs, falling stock prices, and diminishing funding for startups have hit. It’s a problem that could spread to smaller banks, too.
The Federal Deposit Insurance Corporation (FDIC) announced Friday that Silicon Valley Bank, the 16th largest lender in the US with about $209 billion in assets, had failed. As a result, it seized the lender’s assets and closed its doors.
The bank had been struggling mainly due to the Federal Reserve’s aggressive rate hikes in recent years, which have torpedoed tech clients’ valuations and forced them to withdraw money. As a result, Silicon Valley Bank lost billions of dollars on the value of its Treasury bonds.
Crypto-focused lenders
Crypto-focused lenders are new financial institutions trying to build products around digital assets. But they face many risks, including volatility in the cryptocurrency market that can hit their value and tech failures that may lead to hackers stealing their assets.
Crypto lenders can be categorized into CeFi (centralized finance) and DeFi (decentralized finance). A private company profit from liquidity exchange between savers and borrowers backs centralized platforms.
Decentralized platforms, on the other hand, are backed by a distributed network of lenders and borrowers that operate through blockchain-based smart contracts. This means that consumers and regulators will be able to demand greater transparency. This can help to democratize the financial system, reduce costs, and offer alternatives to traditional savings accounts and fixed-term deposits.
Stock markets
The crash of Silicon valley bank has sparked fear that it could impact the US banking sector. This fear is driven by the fact that many financial institutions rely heavily on client deposits, and even an inkling of doubt can quickly snowball into a problem.
The biggest US bank failure since the 2008 financial crisis sparked a sell-off in all significant financial stocks, with JPMorgan and Bank of America leading losses on Thursday. This was partly because of fears that the Federal Reserve’s series of interest rate hikes might cause something to break in the financial system.
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