Silicon Valley Bank was recently hit hard by the downturn in technology stocks over the past year (along with all the crypto issues since FTX) as well as the US Federal Reserve’s aggressive plan to increase interest rates to combat inflation.
What had happened is that the bank bought billions of dollars worth of bonds over the past couple of years, using customers’ deposits. Nothing unusual there, it is what banks normally do. These investments are typically safe, but due to the crypto chaos and changes to interest rates the value of those investments fell. These investments ended up paying lower interest rates than what a comparable bond would pay if issued now. Oops.
As a result, Silicon Valley Bank’s customers, largely startups and other tech-centric companies, started getting nervous and began withdrawing their deposits. This started a small domino falling.
‘The withdrawals meant that to provide the clients with their money the bank had to start selling its own assets’
The withdrawals meant that to provide the clients with their money the bank had to start selling its own assets to meet customer withdrawal requests. The problem was that they had to sell those for a bit of a loss. Which made people even more nervous.
Now, SVB clients are generally quite savvy when it comes to finances and they know what a run on the bank can mean.
