Financial education for young people 👨🎓👩🎓
Silicon Valley Bank collapsed in a matter of 48 hours. What happens next and what lessons can SVB teach you?
What's happening?
🏛️ Silicon Valley Bank (commonly referred to as SVB) is, or, as of March 10th, was the 16th largest commercial bank in the US. It was based out of Silicon Valley in California, a tech and startup hotspot, and was a popular place for VCs, fundraisers, and investors to deposit funds.
During the pandemic, the Federal Reserve (aka the Fed) kept interest rates very low, to make borrowing money cheap to help stimulate the economy amid shutdowns. This was good news for startups; pretty soon they were rolling in dough because of how (relatively) cheap it was for investors to offer funding. And what did they do with those funds? Deposit them with SVB of course.
All this funding grew SVBs deposits from 2020 to 2021 from $49 billion to $190 billion💸. SVB chose to invest the extra deposits in mortgage-backed securities (🏘️ assets that are usually considered a relatively safe bet but caused big problems during the 2008 financial crisis), but with the Fed’s recent interest rate hikes (see: 📉'Interest Rate Rises in 2022' explained in 5mins!), the value of these assets fell drastically. This put SVB in a tough spot; fear over liquidity, a downgrade from Moody’s (credit rating), and a failed attempt to raise equity spooked execs and investors and caused concerned depositors to start withdrawing cash. Within 48 hours, SVB was no more.
The FDIC (Federal Deposit Insurance Corporation) insures US bank deposits up to $250,000, but in the case of SVB, many depositors had more than $250k in the bank. This caused concern in the startup ecosystem and on Wall Street because wiping out large amounts of capital can have wide-spread ramifications across the economy. In response, the US Treasury and the Fed swiftly stepped in to insure uninsured accounts and offer loans to banks that would otherwise struggle with SVB’s closure, and started seeking to sell SVB. In the UK, HSBC stepped in to bail out the UK branch of SVB, reportedly buying it for a whopping £1. Yes, you read that right. £1.
Why it Matters
SVB is the largest bank to fall since the 2008 financial crisis. With the collapse of such a large bank comes lots of fear across the market which is reflected in falling share prices for financial institutions across the board. With such a financially interconnected and dependent world, huge losses in one area are likely to cause losses in others and create a kind of domino effect toppling funds, institutions, businesses, savings, and more. This is why the response of the governments in the US and UK were so important to contain SVB’s failure and its impacts.
Bearish (term used to describe market sentiment; pessimistic) predictors anticipate that the dominos will keep falling despite governments’ best efforts, knocking down other banks, though most people agree it won’t be nearly as bad as 2008. Other US banks have been quick to assure their customers that their deposits are still FDIC insured to prevent further bank runs (when many people who fear the banks will not be able to return their deposits simultaneously rush to withdraw cash too quickly for the bank to handle).
Key Takeaways for You
It’s important to know what is happening in the market 🧑🏫
Even if an issue doesn’t seem to directly affect you, it may still have an impact. SVB mainly serviced tech and life science startups, investors, and VC funds, but its collapse caused fear across the market and among individuals with deposits in other banks because of the chance of the domino effect. This is why it was so important for the governments to step in quickly.
2. Healthy distrust 🤔
While you can trust established banks and the regulations put in place by governments to protect customers, it can be good to have some healthy skepticism. There are many safety mechanisms in place, but the economy is becoming more interconnected and complicated each year so not every risk can be foreseen. This is why it is a good idea to keep an emergency fund with extra savings if you can and to diversify your investments and your risk.
3. Things change 🕑
SVB didn’t expect the Fed to implement its hawkish rate hike regime. If it did, it wouldn’t have had such a large exposure to mortgage-backed securities. What you can take away from this is that things will change over time and it is good to remain flexible. It is helpful to be open to adjusting your goals, expectations, and situation if needed, and to ensure you are adequately diversified to handle unforeseen changes in the market or your own life.
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