Silicon Valley Bank, the 16th largest bank in the US, recently faced financial difficulties, causing a run on the bank. The bank primarily served big tech startups and accounted for 44% of lending in the tech sector in the US. It also had a $400 million lending book in Canada.
However, the bank’s focus on the tech sector proved to be its downfall. The bank had too many deposits and not enough clients to lend to, leading to a gap in its loan book. This gap was filled with investments in bonds, but with rising interest rates, the value of those bonds decreased and caused a loss for the bank.
The loss, combined with rumors and concern from depositors, including prominent venture capitalist Peter Thiel, led to a rapid withdrawal of funds and, ultimately, the failure of Silicon Valley Bank. This event raises questions about the stability of banks, especially those with a narrow focus. It highlights the potential consequences of mismanagement and overreliance on a single sector.
Silicon Valley Bank: The Failure Story
Silicon Valley Bank was one of the most popular banks in the US, primarily serving big tech startups. However, in March 2023, the bank faced a major crisis, leading to its downfall. This article will discuss the reasons behind the failure of Silicon Valley Bank.
Overreliance on the Tech Sector
Silicon Valley Bank primarily served the tech sector, accounting for 44% of the lending in the tech space in the US. When the tech sector was thriving in 2020 and 2021, this resulted in a significant amount of deposits. This meant the bank had put all its eggs in one basket, relying solely on the tech sector.
However, with the era of rising interest rates, this resulted in a major problem for the bank. The bank had too much money in deposits and not enough clients to lend the money to. To solve this issue, the bank increased its lending book in Canada to tech startups, which was a $400 million book.
Lack of Lending Opportunities
Silicon Valley Bank’s biggest problem was that they didn’t have enough companies to lend the money they had on hand to. This resulted in a gap between the bank’s $189 billion of deposits and the $66 billion loan book. The bank invested $128 billion in different types of bonds to make up for this gap.
However, with higher interest rates, these bonds’ value decreased significantly. The $128 billion worth of bonds became only worth about $91 billion when the bank went under. This led to a $1.8 billion loss from selling some of its bonds, which was necessary to cover withdrawals and caused a significant drop in the SVB share price.
Investments in Bonds
Banks make money by taking deposits, paying low-interest rates to depositors, and lending that money to borrowers. The spread between the interest paid to depositors and the interest received from borrowers represents the profits for the bank.
With the rise in interest rates, the value of bonds went down significantly. This resulted in losses for Silicon Valley Bank, leading them to try and find money to cover these losses. This led to many depositors, including Peter Thiel and companies in his portfolio, to pull their money, causing rumors and a run on the bank.
The failure of Silicon Valley Bank resulted from its overreliance on the tech sector and lack of lending opportunities, leading to investments in bonds that were impacted by higher interest rates. The bank faced massive withdrawals and had to sell bonds at a loss, ultimately leading to its downfall.
Summary:
Silicon Valley Bank was a financial institution that primarily served tech startups and was the 16th largest bank in the US. However, the bank faced financial troubles and ultimately failed due to its reliance on the tech sector and the rising interest rates.
SVB had a large number of deposits but not enough clients to lend the money to, so they invested a large portion of the deposits into bonds. However, as interest rates increased, the value of the bonds decreased, causing the bank to take a loss and leading to concerns among depositors about the security of their money.
The loss and subsequent withdrawals caused by the alarm sounded by prominent figures such as Peter Thiel ultimately led to the failure of Silicon Valley Bank.
It’s important to note that deposits of up to $250,000 are federally insured(FDIC) in the US and up to $100,000 in Canada(CDIC). The failure of Silicon Valley Bank serves as a reminder of the fragility of banks and the potential consequences of relying on a single sector for financial stability. The US Treasury Secretary is reportedly monitoring other banks to ensure that similar problems don’t arise.
