The Collapse of Silicon Valley Bank: Lessons Learned from a High-Risk Lending Model

The unforeseen collapse of Silicon Valley Bank( SVB), one of the largest banks in the US, has transferred shockwaves through the global banking and technology sectors. The California- grounded bank was formerly a favored fiscal institution for the tech assiduity, but its ill- fated investment opinions led to its downfall.

SVB's Collapse

Established four decades ago, SVB was known for its technological prowess and smart decision- timber. It provisioned to the fiscal requirements of technology companies worldwide and grew to come the 16th largest bank in the US. still, the bank's fate took a turn for the worse when it invested heavily by long- dated US government bonds, including those backed by mortgages.

The seeds of SVB's demise were sown when it invested heavily in these bonds, which were considered to be safe as houses. Unfortunately, bonds have an inverse relationship with interest rates, which meant that when the Federal Reserve started to hike rates fleetly to combat affectation, SVB's bond portfolio started to lose significant value.

Still, it would have entered its capital back, If SVB had held those bonds for a number of times until they progressed. still, as profitable conditions estranged over the last time, with tech companies particularly affected, numerous of the bank's guests started drawing on their deposits. SVB did not have enough cash on hand, and so it started dealing some of its bonds at steep losses, terrorizing investors and guests.

The run on the bank was touched off on 8 March when it blazoned a$1.75 bn capital caregiving. It told investors it demanded to plug a hole caused by the trade of its loss- making bond portfolio. guests were now apprehensive of the deep fiscal problems at SVB and started withdrawing plutocrat en masse. Unlike a retail bank that caters for businesses and homes, SVB's guests tended to have much larger accounts, which meant the bank run was nippy.

Two days after it blazoned it would raise capital, theUS$ 200bn company collapsed, marking the largest bank failure in the US since the global fiscal extremity. Governments and controllers around the world, including in the UK and Australia, are checking for SVB exposure in their commercial and banking sectors.

Impacts and Concerns

Immediate concerns of wide contagion have been contained by the US government's quick response in guaranteeing all deposits of the bank's guests. Financial futures, which allow investors to presume on unborn price movements, rallied for the US technology sector in response to the guarantees.

The longer- term question is whether SVB's vulnerability to rising interest rates is matched in other banks through anover-exposure to falling bond prices. While some experts believe that the banking system isn't about to unravel, there are enterprises that rising interest rates could lead to broader weakness in commercial balance wastes.

To fight the threat, the Federal Reserve has unveiled a new program that allows banks to adopt finances backed by government securities to meet demands from deposit guests. This is designed to help banks from being forced to vend government bonds that have been losing value due to rising rates.

There are, still, further immediate enterprises for the technology sector. SVB provisioned to Silicon Valley, backing startups and other technology companies that traditional banks might wince down from. In recent months, the sector has been cutting staff as profitable conditions deteriorate. At a time when they need fiscal backing, one of its biggest sympathizers has collapsed.

While the government isn't saving SVB, it'll stay revived or wound up with remaining means dispersed to creditors unless a buyer can bring it back to life. Shareholders in the bank and some relaxed creditors are not defended by the guarantees.

Conclusion

The collapse of Silicon Valley Bank highlights the pitfalls of investing in long- dated US government bonds during times of profitable query and rising