Silicon Valley Bank, known for lending money to some of the biggest technology startups, has collapsed leaving billions of dollars belonging to companies and investors stranded. The California regulators have put the Silicon Valley Bank under the control of the US Federal Deposit Insurance Corporation which is acting as a receiver and it will liquidate the bank’s assets to pay back its customers, including depositors and creditors.
How Did the Silicon Valley Bank Collapse?
It all started when the SVB announced that it had sold a bunch of securities at a loss and that it would sell $2.25 billion in new shares to shore up its balance sheet. The announcement triggered panic among key venture capital firms, who reportedly advised companies to withdraw their money from the bank. Better Markets CEO Dennis M. Kelleher, said: “SVB’s condition deteriorated so quickly that it couldn’t last just five more hours. That’s because its depositors were withdrawing their money so fast that the bank was insolvent, and an intraday closure was unavoidable due to a classic bank run.”
The downfall partly came from the Federal Reserve’s aggressive interest rate hikes over the past year. Back when the interest rate was low the banks loaded up on low-risk treasuries, upon an increase in the interest rate, the value of those assets fell, leaving banks sitting on unrealized losses. Moody’s chief economist Mark Zandi said; “Higher rates have also lowered the value of their treasury and other securities which SVB needed to pay depositors.”
US Regulators Shut Down Signature Bank
The US Regulators have shut down New York-based Signature Bank, in a bid to prevent the spreading banking crisis. Treasury, Federal Reserve, and FDIC said in a joint statement; “We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority.” The President of the US, Joe Biden said that the American people and American businesses could have confidence that their bank deposits will be there when they need them.
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