With the Friday sudden collapse of the Silicon Valley Bank, this is the third time that the US is facing a huge financial crisis after 2007 and 2008. A financial collapse in a country is not just something that affects the respective natives. It is also a crucial split second for the whole world economy as well. As per the US history, there had been some instances where they faced such pivotal moments. The worst-case scenario had been the 9/11 WTC collapse in 2001. And the whole world still perishes and dreads this incident. After that, it was in 2007 and 2008 that America again besotted with a financial problem. This period in history is more popular than the Global Financial Crisis (GFC). A chain of banks that collapsed during the time were Douglass National Bank and Hume Bank, Hume Bank, and more. Also, there were IndyMac and Washington Mutual Bank. We can see that within two decades, there has been a chain of such incidents around the world, especially in the US. This article discusses broadly the recent US bankruptcy.
About Silicon Valley Bank:
Silicon Valley has been one of the most reputed banks in the world, established in the year of 1983. Before the current position of the bank, it was the top 16th largest bank of commerce in the USA. Coming to the huge reserve of technology and life science in the US, this bank singlehandedly has backed more than half of these ventures for ages.
Besides America, this has a bank chain in other well-developed countries like Germany, Canada, and Sweden. Also, they provide financial insight to South Asian countries like China. The United Kingdom also gets financial aid from this reputed bank.
The sole benefit this SVB has gained is through its rapid expansion over the global platform. The most advantageous provision of this bank for its consumers is the unexpectedly low borrowing cost. The pandemic-originated boom in the need for digital devices and connections has also contributed to the explosive growth of this bank in this short span.
This bank has created a record of assets including its loans by tripling from $71 billion in 2019 to $220 billion by the end of 2022 March. During that period, the deposit amount also spiked from $62 billion to $198 billion. During this period, some start-ups deposited their cash to the lenders, resulting in the doubling of the global headcount.
Causation of the Sudden Fall of SVB:
The collapse of the SVB was very sudden, within just a matter of 48 hours. As the customers dragged their deposits from the lenders in the active run of the bank, it caused the collapse out of the blue.
And the root of the depletion is very easily identifiable. Since the borrowing cost of the bank is minimal, it became drudgery for the bank to bear on. Like other American banks, SVB also furrowed billions of money in Government bonds. It was back in the era when their interest rate was almost zero that resulted in this tragedy. The quick safety bet that was unstuck was the immediate hike in the interest rates of the Federal Reserve Bank. It was the most effective step to tame inflation on an emergency note.
The Aftermath of the Collapse:
During the rise of the interest rate, bond prices had fallen. This has caused a drop in the SVB bond value and portfolio. As per Reuter’s report, the last decade’s treasury yield from this was around 3.9%. In the last 48 hours, it has drastically reduced to an average of 1.9% after the accident.
In that meantime, there was a hike in the Fed that hiked which took the borrowing cost higher. That results in the tech start-ups spending more money to channel for repaying the debt. What made their struggle even worse is to find the capital for their new ventures. This has made the companies drag down their deposits from the SVB for funding their operational growth.
The latest episode of this collapse was the fallout from the Federal Reserve’s actions. It seems the rate of inflation is the most aggressive state in its four-decade run. And the solution to this grave problem was very unprofessional as given by SVB CEO Greg Becker. He failed to inflict confidence in the consumers’ minds with his lame advice to ‘stay calm’.
The Death Blow:
As per the report, the consumers had withdrawn almost $42 billion of their deposits by the middle of the last week. And by the end of the week, the SVB reported a negative balance of $958 million. Also, they failed to draw enough collateral from other resources.
There have been some resources that have created an equally effective social media panic. Promising funds like Coatue Management and Union Square Ventures have sent repeated emails addressing their complete roaster of start-ups. With triggering intimidations like ‘hey get your deposits out, this thing is gonna fail’, it is no less than shouting shark in the water. Reliable and efficient previous consumers pointed out these have been the most shroud self-fulfilling prophecy ever.
By the end of March 10th, last Friday, the shares of SVB continued to deplete. And yet the bank decided not to sell their shares. Instead, the bank was in futile search of a buyer at this perilous time. However, the flight of their deposits turned the sale process even harder, resulting in the drastic failure of the venture.
As per the financial regulator of California, this bank has become incapable of compensating its due obligations. This leads the bank to an indefinite adjournment of insolvency.
How can a person get affected by this accidental collapse:
As per the survey reports, in 2021, SVB’s venture created a benchmark. The loans that have been dispersed for entrepreneurship, there are significant proportions of these. 49% of the entrepreneurs were women and 10% of the business owners were Hispanic. It was a 75% hike for women business owners and 25% for Hispanic business owners since 2019. There has been a significant diversification in the catering of their service that no other financial aid institutions have ever made.
With the collapse of such a reliable bank, the scope of aid for women and minority business owners has now come into grave question. Giorgi explained how women founders have always been underbanked in history. SVB has somewhat filled the need for women founders. Now with the position of the bank in soup, the scope started immediately declining.
A downfall in the financial sector gravely affects all the other constituting institutions in the country as well as in the global world. Finance is the backbone of all countries, the nexus of universal progression. The collapse of such a worldly bank definitely will curve a dark phase in the local and global economy for certain. Above article will help to inflict this fact. It will be devastating for the infrastructure of the US as well as for the world. This can mark a very dark time in the history of the US finance. But, on a positive note, we are hopeful that this country will come against these odds, just as they survived many previous blows.
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