Silicon Valley bank failure

It is the largest US bank since the 2008 crisis and underscores the recent struggles of the technology sector

Silicon Valley Bank (SVB), one of the largest US banks in the emerging technology sector, Failed It required the intervention of the US government. It is the largest bankruptcy in the country’s financial history since Washington Mutual in 2008 and marks the end of a bank that was valued at more than $44 billion just a year and a half earlier. Deposits of up to $250,000 will be guaranteed by the Federal Deposit Insurance Corporation, the body that gives guarantees on checking accounts, but almost all investors have much higher amounts in SVB that now risk not being refunded.

The news of SVB’s bankruptcy had negative repercussions on stock markets, but they are less comprehensive than expected. The US banking system is solid and stable, ie explained Treasury Secretary Janet Yellen, but there are still implications for big tech-focused stock companies. In fact, some of the biggest and most important use SVB’s to manage their finance activities, disburse funds for startups and direct their spending activities.

svb has been established Founded in 1983 in Santa Clara, California and in a short time became one of the major banks in Silicon Valley, where IT companies began to focus. In 2021 the bank I managed About half of the money used to fund startups: It has grown rapidly and has attracted many investors who are interested in owning a bank that specializes in investments in the technology sector.

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For a long time, business has gone very well, thanks to the successes and rapid growth of technology companies. SVB has raised financial resources of various kinds for $200 billion, a significant figure, but in any case far from those raised by the largest and most traditional US banks, usually in trillions of dollars.

Generally speaking, SVB used money deposited by its clients to invest it in bonds (bonds), a strategy that was very popular among banks and which paid off handsomely until last year when inflation started to pick up. The US central bank (the Federal Reserve) intervened by raising interest rates, which devalued the investments it had already made at lower rates.

Like other banks, SVB could have waited for the natural end of investments already made to stop the problem, but it found itself dealing with a severe economic downturn associated with Silicon Valley technology companies. The influx of new deposits decreased and many customers began to question the solidity and reliability of the bank, so much so that some opted out Retreat Private funds also at the request of some investment funds.

On March 8th, things got worse when SVB Financial Group, a subsidiary of the bank, announced the… sale of securities worth $21 billion, with an expected loss of about $2 billion. The bank hoped that this would restore its balance sheets, but the announcement of the losses increased the fears of customers and investors, causing a new wave of withdrawals by account holders. Finally, on Friday, March 10, the government intervened in the decision to close the bank to protect account holders.

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According to analysts, SVB failed very quickly due to too much exposure to one sector, that of Silicon Valley technology companies, and a consequent lack of differentiation with investments in other sectors. As long as the growth of some startups and already established companies was strong, the SVB also had no problems in other phases of the general economic downturn. The bank has also been chosen by many investors because it provides easy access to credit for startups, with schemes specifically for financing companies that are by definition losing money at the startup stage.

Due to the specificity of SVB, the analyzes circulated so far do not indicate specific risks for the rest of the US banking sector. Bankruptcy will have limited repercussions, but in any case it is another sign of a moment of difficulty affecting venture capitalists, those who invest in new technology companies by often betting their future on high-risk financing.

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Thelma Binder

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