Blood bath in Wall Street! - What happened to Silicon Valley Bank and how it collapsed in just 48 hours!

 

Blood bath in Wall Street!

 

The Biggest Bank fail since 2008 global financial crisis!

 

What happened to Silicon Valley Bank and how it collapsed in just 48 hours!

 

It was another Black Friday yesterday. All over the world, the stock exchanges bled.

 

All because of the collapse of the Silicon Valley Bank (SVB). California State Authorities closed down SVB and kept under receivership of the Federal Deposit Insurance Corporation.

 

Let us try to understand what happened in the last 48 hours

 

Silicon Valley Bank was a commercial bank headquartered in California. SVB was the 16^th largest bank in the United States and is the biggest bank in Silicon Valley based on local deposits, with a 30% market share.

 

Everything started with Bank’s announcement of its intention to raise funds to the tune of $ 2 billion. 

Strange! Isn’t it?

 

Yes, this announcement created panic among the investors as the rumor about the gaps in its balance sheet was coming true and there was a massive sell off and run for the deposits.

 

As the panic grew, SVB shelved its plan for the fund raising, but the damage was already done, share price went down 60%. And the rest is history, now.

 

Is Federal Reserve the Villain?

 

Analysts say SVB was the victim of recent hikes in interest rates Federal Reserve and the fears of more hikes in 2023.

 

After a period of continued low interest regime during the covid pandemic, central banks led by the US Federal Reserve, started raising rates aggressively to tackle inflation. 

 

How did it affect SVB?

 

Investors normally do not take risk, when the money available to them is costly. Due to the increased interest rates, money become expensive.

 

SVB was mainly catering to Technology companies and Start-ups. Tech and Start-ups are considered high risk. So investors put SVB in the high risk investment category. Further, the customers of SVB were all Tech and Start-ups. They also were reluctant to take risk.

 

High interest rates led to shortage of funding to Start ups which are otherwise considered to be highly risky. So they started withdrawing money from SVB for their liquidity needs. So SVB had to meet higher demands of withdrawals from customers. On the other side, investors were not ready to bet funds on SVB.

 

So, there was a fund shortage in SVB. To rescue themselves from collapse, SVB sold $ 21 Billion investment portfolio at a  huge loss of $ 1.80 Billion.

 

This was the biggening of the end

 

To compensate this loss, SVB decided to issue $ 2 billion equity and preference shares.

 

But this sudden announcement created doubts about the strength of the Balance Sheet of SVB, among investors. Adding the woes, Silvergate Capital, a Crypto focussed bank closed its shutters on the same day.

 

The result was a panic selling in SVB shares as well as a mad rush to withdraw the deposits.

 

Desperately, SVB tried to sell the company on Friday, which also was not successful and the authorities stepped in and put the bank under receivership.

 

The crash in the Wall Street was contagious and it spread all over the world, including Indian stock markets. Stocks of major banks and Financial Institutions took the hit worldwide, affecting the investor sentiments.

 

SVB collapse is the second biggest bank failure after Washington Mutual failure in 2008, which was followed by Lehman Brothers and Bear Stearns which triggered a systemic banking crisis and led to collapse of a lot of small and medium banks.

 

Will it trigger another financial crisis?

 

At this point to time, it is not very clear whether it will lead to another financial crisis like 2008.

 

Many reasons for it:

 

There were a lot of stricter regulations implemented after 2008 crisis, especially in the case of bigger banks, including capital adequacy.

 

Secondly, SVB was more focussed on Tech and start-ups.

 

Thirdly, even though the SVB was the 16^th biggest bank in USA, it was still a smaller bank compared to other big banks. So its reach and influence was limited to that extent only.

 

As the regulatory oversight was less in the case of SVB and capital adequacy norms were not stringent, SVB could invest aggressively without keeping adequate  reserves to tackle this kind of situations.

 

So, most analysts think that this will not have a cascading effect on the economy. But certainly, it is a wake up call for banks like SVB whose deposit base and business are not adequately diversified.

 

Is it a failure of the Federal Reserve?

 

Some analysts think Federal Reserve miscalculated the impact of rising interest rates and so these are self-inflicted damages. If more banks are going to be failed, then situation will be very tough and Federal Reserve may be forced to reduce the interest rates.

 

So, who will be hurt most by the SVB crisis?

 

1.    Uninsured depositors of SVB. Reports say 90% of the $ 175 Billion deposits are un-insured.

2.    Investors of SVB

3.    Investors who suffered losses due to sudden crash of indices world over. Sensex lost nearly 1450 points in just 2 days.

4.    Tech and Startup customers of SVB

 

Conclusion

 

Even though SVB may not trigger another global financial crisis, it caused huge loss to depositors and innocent investors. But it is a lesson to all that any big corporates can collapse any time, if not governed properly. It took only 44 hours to a banking behemoth like Silicon Valley Bank to collapse like a pack of cards.