10 Things to Know About Silicon Valley Bank Crisis

Published : 6 Apr 2023

Silicon Valley Bank exploded in 2020 to become the nation’s 16th largest bank, with the majority of the US Silicon Valley’s big Tech-Startups, raising huge funds in a funding spree from venture capitalists and big investors and depositing their surplus/unutilised fund raises with SVB.

1. Silicon Valley Bank

2.  SVB couldn’t lend all those billions of dollars out with everyone already flush with cash, so they opted instead to purchase long-term, U.S. government bonds and notes

3.   The trouble stirred when the US Federal Reserve (the US Central Bank like RBI in India) increased the Federal Interest Rate (US Central Bank lending rate like Repo Rate in India) in a series of interest rate hikes, in order to curb inflation.

4.   As the theory goes, when the interest rates rise, the bond prices decline. The US Treasury bonds that the bank bought earlier tanked in value as the increase in the US Federal Interest Rate, resulted in the decline in the bond prices.

5. At the same time funding winter began, Silicon Valley Start-ups started incurring cash losses and faced a funding freeze and stopped getting funds from investors.

6.  Due to the panic, the startups/depositors, started demanding the deposit withdrawals.

7.   Under pressure to give the money back, the bank had to sell off the US Treasury bonds at a loss of around $1.8 billion.

8.  To compensate for this loss, SVB announced the capital raise of 2.25 billion USD along with its stock sale. This created panic among the Silicon Valley Startups, and further accelerated the process of withdrawal of their deposits from SVB.

9.  The bank couldn’t get anymore fresh deposits as the increased interest rates made them more expensive

10.  All the mayhem, led to the stock prices to plummet as much as 60% and ultimately the collapse of the SVB Bank