Silicon Valley Bank
Prior to its demise, Silicon Valley Bank, which was founded in 1983, ranked as America's 16th-largest commercial bank. About half of all American venture-backed technology and life science startups received banking services from it.
It also conducts business in the following countries: Canada, China, Denmark, Germany, Ireland, Israel, Sweden, and the UK.
SVB benefited greatly from the tech industry's recent years of spectacular growth, which was powered by extremely low borrowing costs and a rise in demand for digital services brought on by the pandemic.
Financial documents show that the bank's assets, which include loans, more than tripled from $71 billion at the end of 2019 to a high of $220 billion by the end of March 2022.
Why did it collapse?
During a hectic 48 hours in which consumers frantically withdrew deposits from the lender in a traditional run on the bank, SVB abruptly collapsed.
But, the cause of its demise has been brewing for a while. During the period of almost zero interest rates, SVB invested billions on US government bonds, just like many other banks.
As the Federal Reserve aggressively increased interest rates to control inflation, what once appeared to be a safe bet quickly unraveled.
When interest rates rise, bond prices fall, hence the surge in rates destroyed the value of SVB's bond holdings. According to Reuters, the portfolio's average return last week was only 1.79%, considerably lower than the 3.9% yield on the 10-year Treasury.
At the same time, the Fed’s hiking spree sent borrowing costs higher, meaning tech startups had to channel more cash towards repaying debt. At the same time, they were struggling to raise new venture capital funding.
That forced companies to draw down on deposits held by SVB to fund their operations and growth.
The US federal government has stepped in to guarantee customer deposits, but SVB’s downfall continues to reverberate across global financial markets. The government has also shut down Signature Bank, a regional bank that was teetering on the brink of collapse, and guaranteed its deposits.
In a sign of how seriously officials are taking the SVB failure, US President Joe Biden told Americans Monday that they “can rest assured that our banking system is safe,” adding: “We will do whatever is needed on top of all this.”
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