Link to article: https://www.cnbc.com/2023/03/10/silicon-valley-bank-collapse-how-it-happened.html
Silicon Valley Bank (Ticker: SIVB) surprised its investors on Wednesday with news saying it needed to raise $2.25B to help support its balance sheet. Then on Friday, regulators seized its deposits, which means that this is the largest bank failure since the Financial Crisis in 2008s
The reason for this collapse is thought to stem from dislocation caused by high interest rates. As startups started withdrawing money from the bank to keep their companies afloat in an environment that is harsh for fundraising and for IPO, the bank soon found itself short of capital. The bank was forced to sell all its bonds at $1.8B loss.
After the call with that announcement that Thursday, the stock plummeted by 60% and customers withdrew a total of $42 billion at the end of that day.
As far as I know, this is one of the largest negative side-effects of the Fed's decision. I am interested to see how the Fed would react to this dilemma where if they stop raising rates when inflation will be out of control but would doing so cause other banks to fail as well?
7 comments:
The collapse of Silicon Valley Bank and its subsequent seizure by regulators is certainly a concerning event for the financial sector. The fact that the bank needed to raise such a significant amount of capital to support its balance sheet highlights the challenges that financial institutions face in the current economic environment.
It is not surprising that high-interest rates have contributed to this situation. Startups and other companies that rely on funding are especially vulnerable to the effects of interest rate hikes. The loss of $1.8 billion in bonds is also a significant blow for the bank, and it is understandable why its investors would react so negatively to the news. The sharp decline in stock prices and the large-scale customer withdrawals further underline the severity of the situation.
It's truly disheartening to see a bank run leading to the total collapse of a top 20 US bank in a bank failure unprecedented since the Global financial crisis. It was truly incredibly seeing a bank facing short term liquidity issues due to a bad bet on Mortgage Based securities that unraveled in this high interest rate environment, and the sale of said MBSes at a loss.
I am also interested in the 50 odd Investment Bankers at SVB Leerink, most of whom were poached from the UBS TMT division in 2021.
The collapse of Silicon Valley Bank is a concerning development that highlights the potential negative effects of high-interest rates on the financial industry. The fact that regulators seized its deposits signals a major issue with the bank's financial stability, which could have long-term consequences. The loss of $1.8B in bonds is a significant hit that will undoubtedly impact the bank's ability to recover. The withdrawal of $42 billion in a single day is also a worrying sign of the panic that can ensue in a financial crisis. It is crucial to monitor how the Fed responds to this situation and whether it will choose to prioritize controlling inflation or preventing further bank failures. The balance between these two objectives could have significant effects for the wider economy.
I wonder how will this impact the interest rates in the US, like will they go further up? The second question I have people are taking out their money to support their businesses so there will be more money circulation, but also the interest rates are high so how will the economy react to money circulation and high interest rates?
Many of the banks customers pulled their money out because they saw the bank sell their bonds to get cash to create "wiggle room." SIVB should've held onto the bonds to not cause panic or been ready for the withdraws after buying their bonds back. Overall, this whole situation was handled terribly and people are not happy that the government had to bail out yet another large bank.
If the FED does stop raising interest rates to save banks, it will only make our financial system worse and inflation will reach record levels in the U.S. I think that we need the worst of this imminent recession now or we could see our financial system collapse. The lack of liquidity, poor risk management, and credit are what have drawn us to the problems we see today. As much as we do not want a recession to happen, they have to occur to make sure a system does not grow to the point consumers cannot participate in it.
Hello Jeremy,
This is a very tricky situation. The federal reserve must respond to the situation, but the question is how and what are they thinking of doing? To your point, if they stop raising interest rates then consumer confidence will further increase leading people straight to the banks. But doing so will cause these banks to fail as well. Does the Silicon Valley Bank just accept its loss on the selling of its bonds and accept the failure, or do they borrow from other banks? As of now, the next move should be on the federal reserve.
Overall, good insights Jeremy. Well done.
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