They say that history doesn’t usually repeat itself but it rhymes, well in this case that might be true. Today we got a glimpse of what is to come if the FED doesn’t intervene and help mitigate the situation. Silicon Valley Bank’s (SVB) collapse came as a result of the failure to raise funds in a short period of time when the bank was in need of money.
It’s the largest lender to collapse since Washington Mutual in 2008.
The company’s assets have been seized by US Federal Deposit Insurance Corporation and will more than likely liquidate the current assets to recuperate funds for customers, creditors, and depositors.
The FDIC, an independent government agency that insures bank deposits and oversees financial institutions, said all insured depositors will have full access to their insured deposits by no later than Monday morning. It said it would pay uninsured depositors an “advance dividend within the next week.”
The back story of this overall fiasco came on Wednesday when the company reported that it had made some bad bets and is currently in the red and in need of money to balance out the business.
This was a tell-tale sign that something was wrong within the organization coupled with the fact that they state that they would sell US$2.2 billion in new shares to help the business stay afloat. Venture capitalists who were then connected to SVB began to inform their clients and others to withdraw funds from SVB which triggered a bank run.
Things went from bad to worse as the stock plummets the following day and things got even worse on Friday morning when shares were halted and the news started to circulate everywhere. Other bank stocks were also affected including the likes of First Republic, PacWest Bancorp, and Signature Bank whose shares were halted.
A classic bank run situation was taking place hence why the closure of operations and seizure of assets happened so quickly.
Silicon Valley Bank’s decline stems partly from the Federal Reserve’s aggressive interest rate hikes over the past year. When interest rates were near zero, banks loaded up on long-dated, seemingly low-risk Treasuries. But as the Fed raises interest rates to fight inflation, the value of those assets has fallen, leaving banks sitting on unrealized losses.
Higher rates hit tech especially hard, undercutting the value of tech stocks and making it tough to raise funds, Moody’s chief economist Mark Zandi said. That prompted many tech firms to draw down the deposits they held at SVB to fund their operations.
SVB bank was among the top 20 American commercial banks, with US$209 billion in total assets at the end of last year, according to reports from FDIC.
Let’s see how this story develops over time, we have seen a lot of different financial institutions collapsing mainly from the crypto high-risk space. It seems it has now spread into the “conservative” brick-and-mortar space.
