Silicon Valley Bank Collapse: How tech industry broke its most prestigious bank?

A locked door to a Silicon Valley Bank (SVB) location on Sand Hill Road is seen in Menlo Park, California (Reuters) As the decade-long period of cheap money comes to an end, the global financial system is beginning to show cracks, and some investors are concerned that the shocking collapse of Silicon Valley Bank signifies the beginning of the end for the markets. Global investors have been forced to deal with a variety of repercussions as a result of the U.S. Federal Reserve's most aggressive interest rate hike cycle since the early 1980s, which other central banks joined. Kyle Bass and Bill Ackman, two prominent investors, think that the government needs to intervene quickly to prevent the collapse of Silicon Valley Bank from causing even more widespread withdrawals from the banking system.

What is Silicon Valley Bank?

Prior to its collapse, Silicon Valley Bank, which was established in 1983 as the result of a poker game, was the 16th largest bank in the US and a key driver of the growth of the technology sector. Because nerds are idolized in the tech sector, it's simple to forget that money, not intelligence, is what drives businesses. Silicon Valley Bank provided that fuel, collaborating closely with numerous firms with VC funding. It made the claim that it was the "go-to bank for investors" and the "financial partner of the innovation economy." The company that owns this website is one of the clients of SVB. Not only that. More than 2,500 VC firms and numerous tech executives banked there. In less than 48 hours, it collapsed.

Does this relate to cryptocurrency in any way?

The SVB disaster wasn't directly related to the current crypto meltdown, but it might make that crisis worse as well. The stablecoin USDC is run by the cryptocurrency company Circle and is backed by cash reserves, $3.3 billion of which are deposited at Silicon Valley Bank. Its stablecoin was supposed to always be worth $1, but after SVB failed, it lost its peg and fell as low as 87 cents. Conversions between USDC and dollars were halted by Coinbase. Circle declared on March 11th that it "would support USDC and offset any gap utilizing business resources, engaging external money as necessary." The value of the stablecoin largely increased. Oh, and $227 million in funds are also stranded with the collapsed cryptocurrency lender BlockFi. [caption id="attachment_113977" align="aligncenter" width="954"] Silicon Valley Bank (Image credit : BusinessToday)[/caption]  

What happens to Silicon Valley Bank’s customers?

The Federal Deposit Insurance Corporation (FDIC), a federal organization that has existed since the Great Depression, insures the majority of banks. Naturally, the FDIC insured the accounts of Silicon Valley Bank, but only up to $250,000. FDIC deposit insurance operates in this manner. For a person, that amount of money can be substantial, but in this case, we're talking about businesses. Many have monthly burn rates in the millions of dollars. According to a recent regulatory filing, as of December 2022, nearly 90% of deposits were uninsured. The amount of uninsured deposits at the time the bank closed was "undetermined," according to the FDIC.

The circumstances leading up to the collapse

It's not precisely simple, but we'll attempt to make it as simple as we can given that it has to deal with the intricate workings of the financial system. Between 2019 and 2021, it begins. Around this time, venture capital funding skyrocketed, which meant that entrepreneurs received a tonne of funding and deposited it with SVB. SVB's deposits increased from around $60 billion in 2018 to $189 billion in 2022, according to Morning Brew. "Net interest margin" is a frequent method for banks to generate income. The problem arises when they provide you a 0.2% interest rate on your savings account while investing the remaining 0.8% in a different type of investment that generates a 1% return on their investment. With interest rates still hovering around 0%, SVB had access to all of these deposits and, in attempt to create a return, invested about $80 million of the $189 billion in long-term mortgage-backed securities. According to reports, these had a yield of about 1.5%, giving SVB a strong net interest margin. In contrast to 2008, there was no issue with these mortgage securities' viability. The problem was that they were long-term obligations that were bought at a time when interest rates were at historic lows and used to guarantee short-term deposits.