Key Takeaways from SVB Crisis
Sillicon Valley Bank ("SVB"), a saviour of startups, has reached a milestone where it needs to be saved itself. Everything happened in the blink of a few hours not because the Bank failed to manage its liability, but because of the asset mismanagement overall.
Who would have known an asset mismanagement could collapse the Bank?
What led to such an unexpected fall?
For context, SVB always went ahead and beyond to support Startups in their lending and deposit needs. Tech startups massively deposited their cash with SVB as it used to be considered one of the finest Banks.
The interest rates were low in 2020 and 2021 therefore, all deposits from Startups were invested in long-dated bonds, which seemed like an extremely secure option back then as they would typically mature at 1.7% interest in 10 years.
However, owing to the rise in interest rates by the US Federal Government this year from 0% to 4.5%, the bonds lose their value, which made all the investments riskier.
At the same time, resultantly, the Tech Investments from Venture Capitals slowed down due to which some startups began withdrawing their deposits with SVB.
Short on cash, SVB started selling the long-dated bonds at a loss. It sold around $2.1 billion of the portfolio at $1.8 billion loss. Another attempt by SVB to stay afloat by raising funds from the market failed miserably. This caused panic among the startups and they started panic withdrawing. Hence, the stock broke down 60% in just a day and erased almost $80 billion in value.
The bank has now been shut down and taken over by the Federal Deposit Insurance Corporation ("FDIC").
- Owing to the crisis, it has become pretty clear that not only our portfolios must be diverse, but our deposits too.
- The decisions taken in a panic situation may cause more catastrophe than imagined.
Likely, it may be acquired by a well-established bank to save the bank's reputation and startup deposits from the crisis. It would be the best solution as well for everyone. The economy has been affected due to this crisis therefore, measures must be taken to reform the regulations relating to deposits and investments in order to avoid such crisis moving forward.
Point to Ponder:
There is a likelihood of some other banks facing the same situation but still trying to cover up.
Image source: Google Images