What caused the Silicon Valley Bank to collapse?
The shutdown and takeover of SVB Financial Group Inc by banking regulators on Friday may be attributed to the US Federal Reserve raising interest rates and dampening investor risk appetite.
Here is the sequence of events that led to the failure of Silicon Valley Bank:
FEDERAL RESERVE RAISES INTEREST RATES
The Federal Reserve has been raising interest rates from record lows since last year to fight inflation. Investors are less willing to take risks when available money becomes expensive due to higher interest rates. This weighed on tech startups — Silicon Valley Bank’s main clients — because it made their investors more risk-averse.
Read more: The collapse of the SVB is a sign of the pain that comes from the end of the easy money era
SOME CUSTOMERS OF SILICON VALLEY BANK ARE SPOT WITH CASH ILLNESS
As higher interest rates closed the IPO market for many startups and private fundraising became more expensive, some Silicon Valley Bank clients began withdrawing money to meet their liquidity needs. This culminated with Silicon Valley Bank this week looking for ways to fulfill its customers’ withdrawals.
SILICON VALLEY BANK SELLS DEBT PORTFOLIO AT LOSS
To fund the redemptions, Silicon Valley Bank on Wednesday sold a $21 billion bond portfolio made up mostly of U.S. Treasuries. At an average of 1.79%, the portfolio yield was well below the current 10-year Treasury yield of around 3.9%. This forced SVB to post a $1.8 billion loss, which it had to offset through a capital increase.
SVB ANNOUNCES STOCK SALE
SVB announced Thursday it would sell $2.25 billion of common stock and convertible preferred stock to close its funding gap. Shares ended the day down 60% as investors feared deposit withdrawals could force them to raise even more capital.
STOCK SALE collapses
Some SVB customers withdrew their money from the bank on the advice of venture capital firms such as Peter Thiel’s Future Fund, Reuters reported. This spooked investors like General Atlantic that SVB had lined up for the stock sale, and the capital-raising effort collapsed late Thursday.
SVB GOES TO RECEPTION ADMINISTRATION
The SVB was looking for alternative financing on Friday, including through the sale of the company. Later in the day, however, the Federal Deposit Insurance Corporation (FDIC) announced that the SVB had been closed and placed under its receivership. The FDIC added that it would seek to sell the SVB’s assets and that future dividend payments could be made to uninsured depositors.
https://www.thehindubusinessline.com/money-and-banking/what-caused-silicon-valley-banks-failure/article66606332.ece What caused the Silicon Valley Bank to collapse?