Welcome back you lovely people! Today you’re going to find out what went wrong with the Silicon Valley Bank fiasco, and you’re going to learn it all in 5 minutes or less!
If you’ve been anywhere near any kind of Media outlet these past weeks, you’ll have heard of Silicon Valley Bank, which I’m guna refer to as SVB moving forward from here. Essentially they were the U.S’s 16th biggest bank before they collapsed.
They focused heavily on tech start ups, and they were one of the major go-to’s for tech companies funded by venture capitalists. So much so that at the end of 2022 it was reported they had $209 Billion in assets, a whopping number!!
So where did it all go wrong?
Rewind with me to the Covid lockdown days. Everyone was restricted to a variety of measures, but for the most part the online world was on fire, going online was all we really had to do. Naturally, this ment the tech industry was on fire. So now picture large sums of money from tech companies, being given to SVB to hold for payroll, expenses etc. Now because of the fractional reserve system, SVB went and used a large part of that money to invest in other avenues (pretty much all banks do this and it is legal, yes!)
It’s this investing that was their first undoing. They didn’t invest wisely. They switched from short term investments which are typically more liquid (easier to turn to cash) and they opted for more longer term investments - Treasuries, mortgage backed securities and the like, not so easily turned to cash, at least not without losing money. Top Tip: When interest rates increase, returns on these types of investments drop. So naturally when The Fed started increasing rates, SVB’s portfolio dropped.
Usually this is manageable as a bank will diversify its holdings to include shorter term, easily liquidated options. So should it’s customers look to withdraw funds, the banks are able to cover it. The problem SVB had, was they didn’t partake in these short term investments.
So we fast forward to the economic troubles that ensued after the pandemic, and as money started to get tighter, their customers started withdrawing funds. Because of the fractional reserve system, and their chosen investments, SVB didn’t have the money to pay their customers. So they had no choice but to cash out of the before mentioned longer term investments at a loss. Then it all really hit the fan…
On March 6th they announced they would be raising $1.75 billion (with a ‘B’) in capital. Basically they needed people to invest to cover their fund shortage. Their customers went into panic mode fearing the bank had no funds, and large swaths started to withdraw their money. This is called a ‘bank run.’ So put the 2+2 together of, more and more customers are asking for their money and SVB doesn’t have the funds to pay… You get a bank collapse within 2 days.
So now we have a collapsing bank and fear in multiple forms:
Customers want their money. The US has insurance for deposits up to $250,000, however a lot of customers are dealing with funds in excess of this amount.
Stockholders saw their shares plummet, and unlike the previous point, they’re not covered by the FDIC.
Banks lend to each other and can essentially be intertwined through various means, so one bank collapsing can have a knock on effect of not being able to make payments to other banks they are indebted to. Or the subject bank can’t give the funds to businesses, who then can’t make payroll, leading to those people or employees to default, in turn leading to banks losing money…. And you get it from here.
How big is this collapse and what knock on effect will it have, particularly in the case of banks needing bailouts, and/or is this going to end up significantly restricting credit as in the 2008 banking crisis.
There are multiple worries on top of the aforementioned, and all very valid concerns. I personally think the fear was fuelled further with banking troubles overseas with the likes of Credit Suisse and Signature bank who both went through buyouts. Then add to the fact multiple banks were set to be reviewed and credit ratings dropped. It’s literally the definition of a domino effect here.
So where is SVB now?!
First Citizens Bank ended up stepping in and buying the majority of SVB’s deposits and loans. Essentially buying $70 Billion dollars worth of assets for $16 and a half billion dollars. The FDIC is working to pay back insured and uninsured customers. Insured depositors had access to their funds as of March 13th, with those uninsured receiving an advanced dividend. Sorry shareholders and unsecured creditors!
Since the government came out and advised most will get their money back, it seems to have settled the fear steadily. Originally Gold and Crypto saw a significant boost in the markets. Overall though, SVB was heavily tech related and it‘s that industry specifically getting hit so hard that started the wave. The larger banks are more diversified, so considered “safer”, so I wouldn’t worry yourself too much yet!
Don’t forget you can watch the video version of this blog on my Youtube channel here. I stick to my goal of keeping you informed in under 5 minutes there as well. Less time than it takes you to make a cup of coffee! Don’t forget to like and subscribe while you’re there!
If you’ve been anywhere near any kind of Media outlet these past weeks, you’ll have heard of Silicon Valley Bank, which I’m guna refer to as SVB moving forward from here. Essentially they were the U.S’s 16th biggest bank before they collapsed.
They focused heavily on tech start ups, and they were one of the major go-to’s for tech companies funded by venture capitalists. So much so that at the end of 2022 it was reported they had $209 Billion in assets, a whopping number!!
So where did it all go wrong?
Rewind with me to the Covid lockdown days. Everyone was restricted to a variety of measures, but for the most part the online world was on fire, going online was all we really had to do. Naturally, this ment the tech industry was on fire. So now picture large sums of money from tech companies, being given to SVB to hold for payroll, expenses etc. Now because of the fractional reserve system, SVB went and used a large part of that money to invest in other avenues (pretty much all banks do this and it is legal, yes!)
It’s this investing that was their first undoing. They didn’t invest wisely. They switched from short term investments which are typically more liquid (easier to turn to cash) and they opted for more longer term investments - Treasuries, mortgage backed securities and the like, not so easily turned to cash, at least not without losing money. Top Tip: When interest rates increase, returns on these types of investments drop. So naturally when The Fed started increasing rates, SVB’s portfolio dropped.
Usually this is manageable as a bank will diversify its holdings to include shorter term, easily liquidated options. So should it’s customers look to withdraw funds, the banks are able to cover it. The problem SVB had, was they didn’t partake in these short term investments.
So we fast forward to the economic troubles that ensued after the pandemic, and as money started to get tighter, their customers started withdrawing funds. Because of the fractional reserve system, and their chosen investments, SVB didn’t have the money to pay their customers. So they had no choice but to cash out of the before mentioned longer term investments at a loss. Then it all really hit the fan…
On March 6th they announced they would be raising $1.75 billion (with a ‘B’) in capital. Basically they needed people to invest to cover their fund shortage. Their customers went into panic mode fearing the bank had no funds, and large swaths started to withdraw their money. This is called a ‘bank run.’ So put the 2+2 together of, more and more customers are asking for their money and SVB doesn’t have the funds to pay… You get a bank collapse within 2 days.
So now we have a collapsing bank and fear in multiple forms:
Customers want their money. The US has insurance for deposits up to $250,000, however a lot of customers are dealing with funds in excess of this amount.
Stockholders saw their shares plummet, and unlike the previous point, they’re not covered by the FDIC.
Banks lend to each other and can essentially be intertwined through various means, so one bank collapsing can have a knock on effect of not being able to make payments to other banks they are indebted to. Or the subject bank can’t give the funds to businesses, who then can’t make payroll, leading to those people or employees to default, in turn leading to banks losing money…. And you get it from here.
How big is this collapse and what knock on effect will it have, particularly in the case of banks needing bailouts, and/or is this going to end up significantly restricting credit as in the 2008 banking crisis.
There are multiple worries on top of the aforementioned, and all very valid concerns. I personally think the fear was fuelled further with banking troubles overseas with the likes of Credit Suisse and Signature bank who both went through buyouts. Then add to the fact multiple banks were set to be reviewed and credit ratings dropped. It’s literally the definition of a domino effect here.
So where is SVB now?!
First Citizens Bank ended up stepping in and buying the majority of SVB’s deposits and loans. Essentially buying $70 Billion dollars worth of assets for $16 and a half billion dollars. The FDIC is working to pay back insured and uninsured customers. Insured depositors had access to their funds as of March 13th, with those uninsured receiving an advanced dividend. Sorry shareholders and unsecured creditors!
Since the government came out and advised most will get their money back, it seems to have settled the fear steadily. Originally Gold and Crypto saw a significant boost in the markets. Overall though, SVB was heavily tech related and it‘s that industry specifically getting hit so hard that started the wave. The larger banks are more diversified, so considered “safer”, so I wouldn’t worry yourself too much yet!
Don’t forget you can watch the video version of this blog on my Youtube channel here. I stick to my goal of keeping you informed in under 5 minutes there as well. Less time than it takes you to make a cup of coffee! Don’t forget to like and subscribe while you’re there!
Ben Robinson PREC
T: (604) 353-8523
E: Ben@benrobinsonhomes.ca