“Silicon Valley Bank collapse could affect 10,000 startups and result in a million job losses.”
The effect of central banks increasing interest rates have created a turmoil in the Small Regional banks across the States. This was the largest bank to fail since the financial catastrophe of 2008. Let’s examine the truth behind these titles.
SVB- Silicon Valley Bank. Some of the largest names in Silicon Valley, including Pinterest and Shopify, have borrowed money from this 40-year-old American bank. Startup values and stock prices reached record highs in 2020 and 2021. SVB also had a huge smile on his face. By the end of 2021, its reserves had increased dramatically from $62 billion at the end of 2019 to $180 billion in 2022.
Like all banks, SVB tried to invest this money, but instead of doing so, they stepped right into a bunch of wrong decisions. FED (Federal Reserve) quickly started increasing interest rates to combat inflation that was plaguing the American Households. Today’s rates have increased from 0.25% to 4.50%. Bond values and interest rates move in opposite directions, so when one increases, the other declines. Consider that the interest rate on bonds is set. A fixed-rate bond is what you, the owner, would choose if interest rates were to decline. But given that interest rates are increasing, why would you opt for a lower fixed rate? As a result, bond values began to decline, as the FED was raising the rates.
At the same time, SVB had accumulated huge unrealized losses, and start-up financing was becoming scarce. Startups started taking their money out. SVB stated on March 8th that it had lost $1.8 billion on the sale of $21 billion in bonds. Then, a significant panic trigger was activated, and a “bank run” was seen. When many depositors attempt to take their money at once out of concern that their bank will not be able to repay them, this is known as a bank run or run on the bank. Withdrawals increased as the equity price fell by Thursday, March 9. And by Friday, March 10th, SVB shares were no longer being traded after dropping 66%. SVB was unable to locate buyers. Regulators had to intervene and put SVB under the Federal Deposit Insurance Corporation’s administration (FDIC).
The US Treasury Department, Federal Reserve, and Federal Deposit Insurance Corporation announced on Sunday, March 12, 2023, that all customers would be covered and have complete access to their money in the event of the bank’s failure. Most experts agree that a ripple impact in the financial sector is unlikely. After the financial crisis of 2008, banks are generally well-capitalized, but the lesser ones may face difficulties due to their risk exposure to the tech and cryptocurrency industries. The SVB collapse has had an immediate impact on the startup community, with many young businesses finding it difficult to process their payroll and access their own capital. Many high-risk ventures that are part of SVB’s loan portfolio have been scattered, depriving many companies of the funding they require to expand.
However, the collapse’s broader ramifications go further. The collapse of SVB is a sign of the escalating financial unrest within the tech industry, which has grown and expanded quickly over the past ten years. This has caused an increase in companies and other businesses, which have incurred significant debt and risk in order to expand. As other lenders and investors evaluate their exposure to risky ventures in response to SVB’s failure, the tech sector may experience a broader financial crisis. This could result in a decrease in the amount of capital available for startups, which would slow down innovation and economic development. The collapse could also have knock-on effects on the broader economy, as the tech sector has become a key driver of growth and employment in many regions. If the tech industry experiences a contraction, this could have ripple effects throughout the broader economy, including in areas such as real estate, manufacturing, and retail.
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