US start-up community has shaken as ‘Silicon Valley Bank’ faces potential collapse
The Global Financial Crisis (GFC) in 2007-2008, was a relentless worldwide economic crisis that happened in the early 21st century. The crisis was triggered by the subprime mortgage market in the United States, which led to the collapse of several major financial institutions and caused significant economic and social turmoil around the globe.
The effects of the 2007-2008 financial crisis were felt across many sectors and industries, with job losses, home foreclosures, and a sharp decline in global stock markets. So, the question is, are we heading towards a financial crisis again? A few days back, a fatal news story was circulated on all the media platforms in the world. ‘The SVB collapsed.’ So, what does SVB stand for? What is SVB known for? and why has it failed?
SVB stands for Silicon Valley Bank was, a commercial bank headquartered in California and a subsidiary of SVB Financial Group. It was One of the largest banks in the United States and the start-up’s favorite bank. It was a leading financial partner of the innovation economy. SVB empowered individuals, investors, and the world’s most forward- thinking enterprises to realize their most audacious aspirations. It has been shut down recently.
After a COVID pandemic, SVB experienced a significant surge in deposits from customers. Therefore, they had to invest the depositor’s money somewhere to gain some profits. And this was the time where all started going wrong!
SVB decided to invest its major portion of its fund (about $100 Billion) in US treasuries i.e. US Government Bonds. Although, according to financial experts, this was not itself a risky move, the size of a fund they invested and the time of investment was inappropriate. At the time they invested, the US Federal Reserve hiked the interest rates much faster to control inflation in the country and the returns on the SVB’s investment got reduced gradually.
As a result, SVB faced a huge loss by selling its bonds portfolio to meet the withdrawal requests of its depositors. Meanwhile, In the crisis, SVB’s credit rating decreased rapidly. This scared depositors that resulted in withdrawing huge amounts of money from the bank. On this demand, SVB could not withstand this situation and eventually, it collapsed.
The US Government has claimed that they are going to take some extraordinary decisions to overcome a potential banking crisis. They assured depositors that their money is safe and soon, they will be able to access it.
Effect US on stock market:
After SVB crisis, there is a panic situation among the investors in USA. Due to this, over the past few days, there has been a noticeable decline in the bankingṣ sector. The First Republic Bank share price fell down up to 60%. Whereas, Signature Bank declined about 25%.
What should we learn:
SVB’s major portion of the fund (about 77%), was invested in one single asset class i.e. US Government Bonds. This move went horribly wrong for SVB. Therefore, Investment should be diversified in multiple asset classes with standard risk management.