Silicon Valley Bank Collapse: The Perfect Storm of Risky Risk-Taking and Unstable Financial Infrastructure
Silicon Valley Bank, which has the 16th largest assets in the United States, is focused on providing credit to technology startups and venture capital firms. It had A great deal of fresh investments from a single concentrated sector. There were an abnormal amount of substantial depositors (business accounts) that were not safeguarded by the FDIC. 3) A ratio of securities with unrealized losses that is significantly higher than its total capital. These characteristics combined with the Federal Reserve raising interest rates, the value of securities dropped, leading to large unrealized losses and ultimately a bank run and collapse.
Until last week, Silicon Valley Bank was a key player in the tech industry’s financial infrastructure. The bank's risk-taking with nascent businesses enabled it to grow quickly. SVB Capital, the bank’s fund management business, invested in some of Silicon Valley's most prestigious VC funds including those raised by Sequoia, Andreessen Horowitz and Ribbit Capital. SVB had been the 16th largest U.S. bank with more than $200 billion in assets and about $175 billion in deposits before it failed last Friday.
The Federal Deposit Insurance Corporation (FDIC), a government agency that safeguards the interests of bank customers, seized control of SVB and established another bank where customers could withdraw their funds. All insured depositors will have full access to their insured deposits no later than Monday.
The collapse of Silicon Valley Bank was the result of a perfect storm of events, but it was also emblematic of a startup ecosystem and venture-capital apparatus that are too unstable, too risky, and too unmoored from reality to be left in charge of something as important as the direction of our technological development. When interest rates increase, the value of the mortgage-backed securities in which the bank has invested deposits decreases. SVB encountered difficulty when the Federal Reserve increased interest rates.
Silicon Valley Bank had wanted to put its deposits to work, so it bought up US Treasury and mortgage bonds that would take years to mature but serve as a relatively safe place to park its cash—as long as interest rates didn’t rise. They rose multiple times, however.
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2. “SVB asset sale overview: ‘Largest footprint in tech ecosystem'” PitchBook News & Analysis, 16 Mar. 2023, https://pitchbook.com/news/articles/asset-liquidations-silicon-valley-bank
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