What Led to the Sudden Collapse of Silicon Valley Bank?

Silicon Valley Bank, which is considered the go-to destination for emerging American technology companies, made headlines for the past two days after suffering a collapse, leaving its clients and investors in a difficult position.

The Silicon Valley bank collapsed due to an unusual withdrawal of deposits and a capital crisis on Friday morning, and was taken over by federal regulators.

The collapse of the bank has been described as the biggest failure of an American bank since the collapse of Washington Mutual in September 2008, which was one of America’s leading savings and loan companies, according to the Arab portal for technology news.

What is Silicon Valley Bank?

Silicon Valley Bank was established in 1983, specializing in banking services for emerging technology companies. It has provided financing for nearly half of the US venture capital-backed technology and healthcare companies.

Many outside of Silicon Valley have not heard of the bank, despite being one of the top 20 commercial banks in the United States. Its total assets reached $209 billion US dollars by the end of last year, according to the Federal Insurance Corporation.

Why did the Silicon Valley bank collapse?

The situation began after the Federal Reserve raised interest rates last year in an attempt to control inflation. Following this strong action by the central bank, the high borrowing costs led to a depletion of momentum for the technology stocks that Silicon Valley had been benefiting from.

High interest rates have caused the long-term bond values to decline, which has affected Silicon Valley Bank and other banks during the period of extremely low and almost zero interest rates. The bank’s bond portfolio, valued at $21 billion, has generated an average yield of 1.79%.

At the same time, the investment capital began to decline, forcing start-up companies to withdraw the deposited money from banks. Consequently, losses in bonds began to loom on the horizon, as customers rapidly withdrew their deposits.

The Silicon Valley Bank Crisis

On Wednesday, the bank announced that it had sold a group of securities at a loss and would also sell $2.25 billion in new shares to support its public budget. This caused panic among major investment capital companies, which were reported to have advised start-up tech companies to withdraw their funds from the bank.

The bank’s stock began to decline on Thursday morning, and by the afternoon it was dragging other bank stocks down with it. Investors were afraid of a repeat of the financial crisis that occurred in 2007 and 2008.

By Friday morning, trading in Silicon Valley Bank shares had stopped, and efforts to raise capital quickly or find a buyer were abandoned. California regulators intervened by closing the bank and placing it under judicial custody with the Federal Deposit Insurance Corporation.

Fears of transmission to other banks

Despite the initial panic on Wall Street, analysts have stated that it is unlikely for the collapse of Silicon Valley Bank to create a domino effect that would grip the banking industry during the financial crisis.

Mark Zandi, the chief economist at Moody’s, stated that the system has ample liquidity and good capital as it did previously. Additionally, the banks that are currently struggling are much smaller and do not pose a significant threat to the wider system.

By Monday morning, all insured depositors will have full access to their secured deposits, in accordance with the Federal Insurance Institution’s regulations. Non-insured depositors will be given an advance return within the next week.

What will happen after the bank collapse?

It is unlikely that the infection will spread to other banks. However, smaller banks that are disproportionately linked to industries suffering from financial stress, such as technology and cryptocurrencies, may be in a difficult position. According to Ed Moya, Chief Market Analyst at Oanda, they could face challenges.

On Friday, Moyia stated that everyone on Wall Street knew that the Federal Reserve’s interest rate hike campaign would eventually break something, and now it is leading to the collapse of small banks.

The Federal Insurance Institution usually sells the assets of a failed bank to other banks, using the profits to reimburse depositors who were not able to secure their money.

It is still possible for a buyer to come forward and rescue Silicon Valley Bank from its crisis.

Is Elon Musk buying Silicon Valley Bank?

Billionaire Elon Musk, whose wealth is now around $180 billion, said on Saturday morning that he is open to the idea of buying the bank.

Ming-Liang Tan, co-founder and CEO of Razer, a company that sells gaming computers and hardware, stated that “I believe Twitter should purchase Silicon Valley Bank to become a digital bank.”

The individual, who acquired Twitter for $44 billion at the end of last October, stated that they are open to the idea without providing further context.