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  5. Analysis: What Silicon Valley Bank collapse means for the U S. financial system PBS NewsHour

Analysis: What Silicon Valley Bank collapse means for the U S. financial system PBS NewsHour

US stocks closed higher on Tuesday, recovering some of their losses after the collapse of three banks tested markets on Monday. In the lead-up to the Silicon Valley Bank collapse, the Federal Reserve and other central banks had been increasing interest rates as a way to fight global inflation. But after the failure of https://bigbostrade.com/ SVB, Signature Bank, and Silvergate Capital, the Fed’s next rate increase was lower than expected prior to the bank failures. To help, the Federal Reserve announced on March 12 that it would invoke a systemic risk exception, meaning that all depositors would be made whole, even for those funds that were uninsured.

  1. Did some misguided regulator prematurely threaten them even though they had no liquidity or coverage problem at that time?
  2. “They really developed a niche that was the envy of the banking space,” said Jared Shaw, a senior analyst at Wells Fargo.
  3. While Moshirian says he doesn’t think the banking system is about to unravel, he notes that people also initially felt that the sub-prime mortgage crisis was contained.
  4. Additionally, Bloomberg News reported on Saturday that regulators were weighing creating a special investment vehicle that would backstop uninsured deposits at other banks, which could keep the bank run from spreading in the coming week.
  5. SVB is the most important capital provider to tech startups and the biggest supporter of the community.

Powell started cranking up rates to slow inflation, and told Congress this week that he expects to let them get as high as 5.75 percent, which is a lot higher than zero. So if you are, let’s say, a bank specializing in startups, do you know what ZIRP world does to you? Well, my children, according to the most recent annual filing from SVB, bank deposits grew as IPOs, SPACs, VC investment and so on went on at a frenetic pace. Founded in 1993, The Motley Fool is why is bp stock so low a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. These false narratives are clogging the airwaves and needlessly confusing the general public—while failing to diagnose the genuine underlying drivers of SVB’s collapse.

Hopefully, things will stabilize, but in a worst-case scenario, management would need to dip into its held-to-maturity bond book to cover deposit outflows. Currently, losses in that portfolio exceed $15 billion, enough to wipe out almost all of SVB’s equity. Fallout from the collapses still has regulators working to install fixes into the system. For example, last week saw reports that the Financial Stability Board was looking into the influence of social media in accelerating bank deposit outflows, as the run on SVB was caused in part by posts on platforms like Twitter (now X).

And as It’s a Wonderful Life explains, sometimes the actual cash isn’t immediately there because the bank used it for other things. That was the immediate cause of death for the most systemically and symbolically important bank in the tech industry, but to get to that point, a lot of other things had to happen first. SVB Financial was reportedly unsuccessful in raising the capital it needs and has scrapped those plans. And the bank was in talks to sell itself, presumably to a large financial institution. CNBC reported on Friday morning that the bank had hired advisors to explore a sale, but sources said that it could be difficult to assess the value of the bank, as deposit outflows are happening at a rapid pace. SVB Financial Group (SIVB.Q 37.26%), the parent company of Silicon Valley Bank, has had a turbulent few days.

Other assets held by SVB include loans that are less liquid and may be more difficult to sell. That process could take several weeks or more and end with uninsured deposits being restored at less than 100%. If a member bank fails, its deposits — that’s the money you’ve put in said bank — are still insured for up to $250,000. Anything beyond that, and there’s no guarantee you’ll ever see again. Part of SVB’s specific problem is that it was so concentrated in its business. SVB catered to venture capital and private equity — as that sector has done well over the past decade, so has SVB.

UBS agrees to takeover of stricken Credit Suisse for $3.25bn

Because investors could buy bonds at higher interest rates, Silicon Valley Bank’s bonds declined in value. During a poker game, Bill Biggerstaff and Robert Medearis came up with the idea for Silicon Valley Bank. And in 1983, the two, along with the bank’s CEO Roger Smith, opened the first branch in San Jose, California. It went public in 1988 and, in 1989, moved to Menlo Park in an effort to cement its presence in the venture capital world. Silicon Valley Bank (SVB) was shut down in March 2023 by the California Department of Financial Protection and Innovation.

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Silicon Valley Bank invested in a number of VCs over the years, including Accel Partners, Kleiner Perkins, Sequoia Capital, and Greylock. SVB’s failure didn’t have anything directly to do with the ongoing crypto meltdown, but it could potentially worsen that crisis, too. Crypto firm Circle operates a stablecoin, USDC, that’s backed with cash reserves — $3.3 billion of which are stuck at Silicon Valley Bank.

What is FDIC insurance, and how does it work? And will SVB customers get their $250,000 back?

Shares fell by more than 60% on Thursday after news emerged that the bank needed to raise capital, and trading was halted Friday after another 60% plunge in premarket activity. While the bank’s 52-week high was just shy of $600 per share, it was trading for less than $40 in Friday’s premarket session. SVB had $209 billion in assets and $175.4 billion in deposits at the time of failure, the FDIC said in a statement. Many of SVB’s depositors were technology workers and venture-capital backed companies.

More recently, Coinbase’s IPO paperwork revealed that Silicon Valley Bank had the right to buy more than 400,000 shares for about $1 a share. Coinbase’s shares closed at a price of $328.28 the first day it was listed. And because of all these liquidity events — congrats, btw — no one needed a loan because they had all this cash. So, as explained in more detail by Bloomberg’s Matt Levine, Silicon Valley Bank bought government securities. This was a fine and steady way for SVB to make money, but it also meant it was vulnerable if interest rates rose.

Congress will look into collapse of Silicon Valley Bank, Senate majority leader says

The fallout from Silicon Valley Bank’s failure prompted President Joe Biden to speak to taxpayer concerns from the White House today. The Federal Reserve, the Treasury Department and the FDIC said regulators took the unusual step of guaranteeing the deposits because SVB presented a major risk for the U.S. economy. But it ended up being the government, not investors, who came to depositors’ rescue.

To fund the redemptions, on Wednesday Silicon Valley Bank sold a $21bn bond portfolio consisting mostly of US Treasuries. The portfolio was yielding it an average 1.79%, far below the current 10-year Treasury yield of about 3.9%. This forced SVB to recognize a $1.8bn loss, which it needed to fill through a capital raise. Now, recall, another bank called Silvergate had just collapsed (for crypto reasons). So when Silicon Valley Bank made this announcement on March 8th, people bolted. Peter Thiel’s Founder’s Fund advised its portfolio companies to pull out, ultimately yanking millions.

This spooked investors such as General Atlantic that SVB had lined up for the stock sale, and the capital raising effort collapsed late on Thursday. On Friday, Silicon Valley Bank, a lender to some of the biggest names in the technology world, became the largest bank to fail since the 2008 financial crisis. By Sunday night, regulators had abruptly shut down Signature Bank to prevent a crisis in the broader banking system.

Is there any risk that more banks might fail?

As the Federal Reserve has increased interest rates, those bonds have become worth less. That wouldn’t normally be an issue — SVB would just wait for those bonds to mature — but because there’s been a slowdown in venture capital and tech more broadly, deposit inflows slowed, and clients started withdrawing their money. When signs of shakiness at SVB began to show, many companies and people with money in SVB moved to pull it out earlier in the week — actions that, ironically, contributed to the bank’s demise. Some SVB clients pulled their money from the bank on the advice of venture capital firms such as Peter Thiel’s Founders Fund, Reuters reported.