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SVB and Tech sector

The tech sector faced yet another blow with the collapse of Silicon Valley Bank in March 2023. The Silicon Valley Bank or SVB was established in 1983. The fall of SVB is the biggest banking collapse since 2008 and the second largest collapse in the history of US. The bank was crucial for tech sector because it readily invested in technology companies and startups. Other banks were apprehensive of doing so because of the uncertainty in the sector. During the pandemic technology sector was at boom because of the need of digitalisation. As per reports by FDIC (Federal Deposit Insurance Corporation) SVB had assets worth $209 billion.

How did the collapse happen

The collapse of the bank is the classic case of lack of diversification of investments and inability to maintain short term liquidity.

Stage 1: Increase in current account deposits

Silicon Valley Bank invested in technology companies and venture capitals. Most of the startup companies in US had current account deposits with this bank. Which means there was constant outflow of cash to meet the working capital requirements of the startups. The deposits of the current accounts increased manifolds from 2019 to 2022.

Stage 2: Over-exposure to the bond market

The maximum portfolio of the company was invested in US bond markets. They invested in Held to mature bonds. The assumption of the bank was that the yeild would remain same in the long run. However the Federal Reserve started increasing the interest rates in 2022 to combat inflation, the yeild of the bonds increased and the values of the bonds decreased. Due to this situation the bank lost USD $ 1.8 billion.

Stage 3: The Bank Run

There was news all over that the shares of SVB had plummeted due to huge drop in their portfolio value. Venture Capitalists urged startups to withdraw from the crisis laden bank. There was panic among the deposit holders and they started to withdraw their money. Bank Run means the rush of depositors to withdraw money due to fear. To meet their huge cash outflow the bank tried to raise capital. However the bank failed to do so and it eventually collapsed.

The bank failed to diversify it’s portfolio. The major chunk of the depositors money was invested in bond markets. They invested in long term securities but failed to protect their short term liabilities.

The way ahead

In US, the FDIC insures deposits of the clients in the banking institution upto a limit of US$ 2,50,000. However the clients of SVB had accounts greater than the FDIC limit, the depositors could only claim the insured money. For the time being FDIC transferred all the money of SVB to a new entity called Deposit Insurance National Bank of Santa Clara. Federal Reserve said in a statement that they would protect and give back the uninsured amount. The apex bank’s decision to save the consumer’s money is crucial because the collapse of such a large banking institution would reduce confidence of consumers in the whole banking system and the economy as a whole.