Why did Silicon Valley Bank fail? Explained!

According to Reuters-NEW YORK, March 10 – This Friday’s closure and takeover of SVB Financial Group Inc. (SIVB.O) by banking regulators can be attributed to the U.S. Federal Reserve’s rising interest rates and decreasing investor risk appetite.

The series of events that resulted in Silicon Valley Bank’s failure is as follows:

  • THE FEDERAL RESERVE INCREASES RATES

Since last year, the Federal Reserve has begun raising interest rates from their historically low levels to combat inflation. When the money that is accessible to them becomes costlier due to the rising rates, investors have less stomach for risk. Silicon Valley Bank’s main clients, technology startups, suffered as a result of its investors becoming less risk-tolerant.

  • A FEW CLIENTS OF SILICON VALLEY BANK EXPERIENCED CASH CRUNCH

Several Silicon Valley Bank clients started taking money out to fulfill their liquidity needs as increasing interest rates forced the market for initial public offerings to close down for many businesses and made private fundraising more expensive. As a result, Silicon Valley Bank began this week to explore solutions to handle customer withdrawals.

  • A BOND PORTFOLIO IS SOLD BY SILICON VALLEY BANK AT A LOSS

Silicon Valley Bank sold a $21 billion bond portfolio on Wednesday, the majority of which were U.S. Treasury bonds, to pay for the redemptions. In contrast to the current yield on the 10-year Treasury, which is about 3.9%, the portfolio was only yielding an average of 1.79%. SVB was compelled to record a $1.8 billion loss as a result, which it had to make up by raising capital.

  • STOCK SALE ANNOUNCED BY SVB

SVB disclosed on Thursday that it would raise $2.25 billion by selling preferred convertible stock and common equity. Investors worried that the deposit withdrawals might force it to seek even more cash, which caused its shares to conclude the day’s trading down 60%.

  • STOCK SALE FUELS UP

According to Reuters, several SVB clients withdrew their funds from the bank on the advice of venture capital firms including Peter Thiel’s Future Fund. The capital raising effort failed late on Thursday as a result of investors, including General Atlantic, who SVB had lined up for the stock sale, being alarmed by this.

  • SVB ENTERS RECEIVING

SVB rushed on Friday to obtain additional money, including by selling the business. Yet later that day, the Federal Deposit Insurance Corporation (FDIC) said that SVB had been closed down and had been given over to its receivership. The FDIC also stated that it will attempt to sell SVB’s assets and that potential dividend payments to uninsured depositors could occur in the future.