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silicon valley bank collapse

After Silicon Valley Bank collapse: 200 more US banks at risk 

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How did the Silicon Valley Bank (SVB) Collapsed?

Silicon Valley Bank (SVB) was a state-authorized commercial bank headquartered in Santa Clara, California now lying in receivership by the Federal Deposit Insurance Corporation (FDIC)

It operated branches in California and Massachusetts, being the largest bank in the region owing to its deposits in Silicon Valley. 

Erstwhile member of SVB Financial Group, an open trading bank holding company with offices in 13 other U.S. states and international jurisdictions alike. 

Also check our blog post: High Performing Stock in USA

The ‘ Fall from Grace’ 

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Image Source: themessenger

It has specially catered to financing the high tech industry and had been the go to bank of almost 50% venture capitalists tech startups. 

In the fateful March of 2023, amidst the interest rate hikes following a period of global inflation came an eventual run-in on its deposits, marking the beginning of the fateful collapse everyone has been talking about since with a complete take over and seizure with the final nail hitting it’s coffin on the March 10, 2023 by the California Department of Financial Protection and Innovation (DFPI), by its regulator. 

The Worst Banking Nightmare Ever -SVB Collapse: even if SVB wasn’t the worst capitalized bank of the lot. 

However, fate had different plans altogether. 

The Silicon Valley Bank is no more. 

The question now, does the aftermath of its sudden demise, further suggests the looming fact-  that whether the sudden collapse of this highly tech-supportive regional bank is just the beginning of being the starting point of something more macabre and sinister— or its just what usually happens when spiraling higher interest rates go overboard allowing financial institutions much less room for error.

We’re surely about to find out. 

Afterthoughts in the financial circles

Silicon Valley Bank Collapse

Image Source: knowledge.wharton.upenn.edu

The U.S Federal Reserve should stop hiking rates after the SVB bank collapses, a lot of critics are thinking this aloud, including a famed American chief economist.

U.S. authorities launched mitigation measures to shovel confidence in the banking system after the traumatic failure of Silicon Valley Bank targeted to trigger a spiraling broader financial crisis loop.

After the bad weekend, regulators said as a saving grace that the failed banks should get a chance to regulate all their deposits in the starting week and would also involve makeshift facilities to give banks some emergency fundings. 

The Federal Reserve also has allowed banks to borrow from these emergency stacks.

Whilst the mitigation measures seem a silver lining for some Silicon Valley firms alongside the buzzing global markets, worries about wider impacting future banking risks are still looming and have cast shadows over whether the Federal Reserve would adhere to its initial plan for an aggressive interest rate skyrocketing initiative. 

More afterthoughts

Silicon Valley Bank Collapse

Image Source: usatoday

But, mitigation trial and errors or not, the incident will surely contribute to some sky high levels of the financial markets’ fierce volatility with some additional fireworks, as investors watch wearily for some craters and aftershocks to emerge as the Fed’s ground shaking policy tightening schematics continues. 

Regulators also moved swiftly to close New York’s Signature Bank , which had come under pressure in recent days. 

The wider thought after efforts to avert a future unwarranted crisis lifted the Wall Street stock that seeks futures in some wholesome Asian trade, helping broaden the markets like a spiderweb.

The Govt angle

Silicon Valley Bank Collapse

Image Source: reuters

The Biden administration’s untimely intervention under covers the unforgiving relentless campaigns by the Federal Reserve and other major market player  banks to beat the slack back inflation is putting some serious strenuous stresses in the entire financial system and global world markets. 

Silicon Valley Bank (SVB), that’s been a crying shoulder for the startup economy, was an end product of the uncountable years-long pre-pandemic generation of  some quick fix cheap money, combined with lethal risks that made it especially crumble.

But as a run back on the bank besieged last week, there are serious worries that others with a shared past and uncanny similarities might catch the rapidly spreading wind quite quickly. 

With the Federal Reserve hell bent and calmly poised to continue the spiraling maelstrom of raising interest rates, investors surely feel the heat and the financial system may not be fully woken out of its worst nightmare yet. 

A lot of financial bigwigs think they no longer had expected  the Federal Reserve to  raise rates furthermore by around 25 basis points at its next policy meeting on March 21-22, amidst the pre-existing cacophony already doing rounds in the banking sector. 

From this point on investors might have to dream of nightmares coming into every tomorrow’s morning and beyond that gear up and understand that they are going to be dealing with a lot of future event risques  according to other financial stalwarts and fortune telling economic gurus. 

And there remains all the unanswered questions  that’s there with other regional banks lined up in the tow.

The Report Details

Silicon Valley Bank Collapse

Image Source: entrepreneur

According to a Social Science Research Network survey a further 186 banks could possibly fail even if fifty percent of the uninsured depositors start withdrawing funds. 

Post the collapse of the Silicon Valley Bank (SVB), a study report found that over 186 US banks are at a major risk of meeting quite a similar fate. 

The major alarming reason being the abominably rising interest rates alongside the higher proportion of uninsured depositors, – if the report is to be believed. 

The Social Science Research Network study report, aptly titled ‘Monetary Tightening and US Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs? Claiming that over 186 banks will undoubtedly fail even if 50 percent of its uninsured depositors withdraw their funds. 

It’s alarming tolling bell of half of the uninsured depositors withdrawal crisis report if they decide to withdraw untimely, almost suggested that over 190 banks are at a highly potential and possible risk of serious fatalities and impairment to its insured depositors, with almost a whopping $300 billion of insured deposits staked in risk the report further reveals. 

It also suggests that even more banks could be at high risk if uninsured depositor’s withdrawals cause small fire sales to top it off.

The immediate concern for the studied banks is the enormity of assets staked as government bonds and mortgage-backed securities, highly sensitive to the spiraling interest rates. 

The total value of these assets took a plunge because of the recent spike in interest rates by the Federal Reserve. 

The Silicon Valley Bank fell victim to the prey of spiraling interest rates by holding its assets in long-term government bonds. 

These government bonds had lost much worth when they were bought because of their erstwhile low paid backs when compared to the current interest rate.

Making up for the deposit withdrawal demand by clients, SVB desperately sold off these assets at an unimaginable loss of approx. to $2 Billion. 

The disclosure of the losses record sparked anxiety and fear among its existing clientele, that mostly comprise tech start-ups, resulting in all of them withdrawing their money at short notice. 

Concluding Thoughts – DejaVu like SVB 

Silicon Valley Bank Collapse

Image Source: businesstoday

The report concludes that SVB wasn’t the worst capitalized bank of the lot and that a further 10% of the surveyed banks have even lower capitalization than SVB. 

However, SVB had an alarming number of uninsured deposits. 

About only 1 percent of banks had a slightly higher rate of uninsured leverage. 

The combined losses and additional uninsured leverages provided added incentive for the SVB uninsured depositor run through, the report claimed.

The report warns that 186 banks could face a similar risk of failure if they don’t build an escape mechanism. 

As further calculations suggest these banks are certainly running at a possible high risk of a run through or be absent -other than hoping for some government intervention or recapitalization, the report concluded.

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