THE FALL OF SILICON VALLEY BANK

On 10th March 2023, Silicon Valley Bank, one of the largest banks in the US shutdown.  The collapse of the Silicon valley bank created shock waves on the entire business world . It is the second largest bank collapse in the US history and the largest bank failure since the 2008 financial crisis. The SVB( Silicon Valley bank) can be considered as an epicenter of tech startups and venture capitals. SVB had invested in around 21 Indian startups and collapse of  SVB might impact Indian startups as well.

SVB is a commercial bank that fund startups inside and outside silicon valley.  Founded in 1983, it became the largest bank in Silicon Valley based on local deposits. More importantly  SVB was a leading banker to most of the successful startups in the world . The energy crisis sparked by Russia -Ukraine war caused inflation all across the world and US also get affected .According to a source the US saw its highest inflation in the last decade whereby the inflation shot upto  9.1%.  To address the inflation, the Federal Reserve (FED) of the US increases the interest rates. When the interest rates are high the demand for the product goes on decreasing , the businesses in the US have to decrease their prices to survive and make the products affordable to the customers.  When the prices of the products decrease, the FED effectively controls it by increasing the interest rates ,  as was done for the short period of time , between 2020-2022 when the interest rate in the US was just 0.08% . The banks gave very low interest loans and americans started to borrow  more money from banks at very low interest rates. 

In case of SVB, 2020-2022 are the best years because they are able to borrow money at 0.08%. By borrowing huge sums of money at a lower rate of interest helped SVB make huge profits.  SVB wanted to compete with the top 5 banks in the US and to attract customers from these banks, they offered them higher interest rates than other banks. SVB offered an insane interest rate of 2.33% to its investors and many big companies deposited money in SVB and this is where the real problem began. .In order to pay interest to their customers, SVB invested 91 Billion USD in long dated mortgage bonds.  The investment in  long term Mortgage Securities which had more than 10 years of maturity and led to an asset liability mismatch. Out of the 91 billion USD , 80 billion USD they invested in MORTGAGE BACKED SECURITIES (MBS),  with 97% of the MBS having 10 years of maturity and giving only an average yield of 1.56%. SVB had promised to pay its investors 2.33% and here the average yield was just 1.56%  which meant that if the same yield continued SVB will face losses. To make things worse, the FED stop buying MBS  and suddenly the value of MBS decreased .FED increased the interest rates by 425 basic points, causing the demand for the loans to fall, and the demand for MBS also decreased . The bond value started dropping as a result of which the security value of SVB security drop from 91 billion to 76 billion USD ,which made a difference of 15 billion USD. 

The third reason is THE STARTUP WINTER the value of bonds keeps on fluctuating with markets. The startups started to withdraw their deposits from the banks. SVB deposits dropped 20Million USD in just three  quarters.  To meet the customer demands they needed cash, and with most of the SVB money stuck in MBS, to counter such a situation the SVB  started selling their MBS, which incurred them a huge loss. To cover up these huge losses,  they raised USD 2.25 billion in the form of debt and equity. SVB stock plunged by 60% in one day and led to the ultimate demise of the bank.