The collapse of Silicon Valley Bank.

The collapse of Silicon Valley Bank (SVB) was the largest bank failure since the 2008 financial crisis. It had severe consequences for the global economy, especially for the startup sector that relied on SVB for funding and banking services.

 

• The Cause of SVB's Collapse. 

 

The cause of SVB’s collapse was a combination of rising interest rates, a slowdown in the IPO market, and a loss of confidence from its customers and creditors. As interest rates increased, SVB’s profitability declined and its exposure to risky loans increased. Many startups that borrowed from SVB faced difficulties in raising capital or going public, and some defaulted on their debts. This led to a deterioration of SVB’s balance sheet and credit ratings.

The result was a run on the bank, as customers withdrew their deposits and creditors demanded repayment. SVB tried to find a buyer or a bailout, but failed to secure any deal. On March 10, 2023, the U.S. Federal Deposit Insurance Corporation (FDIC) seized SVB and sold its assets to Bank of America for $2 billion, leaving a $10 billion gap for the FDIC to cover.

 

• The Effect of SVB's Collapse. 

 

The effect of SVB’s collapse was widespread and devastating. Thousands of startups lost their bank accounts and access to credit, forcing many to shut down or scale back their operations. The innovation ecosystem in Silicon Valley and beyond suffered a major blow, as investors became more cautious and selective. The global financial market experienced a sharp sell-off, as investors feared contagion and systemic risk. Central banks around the world had to intervene to stabilize the market and provide liquidity.

 

• Who makes it happen?

 

The main person who let the collapse happen was SVB’s CEO John Clifton, who was accused of mismanagement, fraud, and negligence. He allegedly inflated SVB’s earnings, hid its losses, and misled regulators and investors about its financial condition. He also engaged in insider trading, selling his shares before the collapse. He was sued by the FDIC, the Securities and Exchange Commission (SEC), and several shareholders for billions of dollars.

 

• Timeline of the Collapse.

 

It's just 5 days from the announcement to the bankrun and sue.

 

On March 8, 2023,

SVB reported a $4.8 billion quarterly loss due to its exposure to low-yielding bonds and struggling startups.

 

On March 9, 2023,

SVB’s credit rating was downgraded to junk status by Moody’s and S&P.

 

On March 10, 2023,

SVB faced a massive bank run as depositors withdrew over $10 billion in a single day. The bank was unable to meet its liquidity requirements and asked for emergency funding from the Federal Reserve.

 

On March 11, 2023,

the Federal Deposit Insurance Corporation (FDIC) seized SVB and transferred its deposits to a newly created bridge bank called New Silicon Valley Bank (NSVB). The FDIC also named John Clifton, the former CEO of SVB, as the CEO of NSVB.

 

On March 13, 2023,

SVB Financial Group and its top executives, including John Clifton, were sued by shareholders for fraud and misleading investors about the bank’s financial conditions.

 

• The Connectivity btw The Collapse of a Bank and the Stock Market.

 

The collapse of a bank can have significant implications for the stock market, as banks are important financial intermediaries that provide critical services to both individuals and businesses. Banks play a crucial role in the economy by accepting deposits and providing loans, and are also responsible for facilitating payments, managing risk, and providing financial advice to clients.

 

When a bank collapses or faces financial distress, it can have a ripple effect on the broader economy and financial markets. One key way in which the collapse of a bank can impact the stock market is through the transmission of financial shocks. If a bank suffers losses or experiences liquidity problems, it may be forced to sell off assets, reduce lending, or even declare bankruptcy. These actions can lead to a decline in the value of assets held by the bank, as well as a reduction in the availability of credit to borrowers, which can have a negative impact on economic activity.

 

The impact of a bank's collapse on the stock market can also be felt through its effects on investor confidence. If investors become concerned about the stability of the financial system, they may become more risk-averse and reduce their exposure to stocks and other risky assets. This can lead to a decline in stock prices and an increase in market volatility.

 

Moreover, the collapse of a bank can also have broader systemic implications for the financial system as a whole. In some cases, the failure of one bank can lead to a chain reaction that spreads throughout the financial system and causes other banks to fail. This can lead to a broader financial crisis, such as the one that occurred in 2008 during the global financial crisis.

 

In summary, the collapse of a bank can have significant implications for the stock market, as banks are important intermediaries that play a crucial role in the economy. The transmission of financial shocks and the effects on investor confidence can lead to declines in stock prices and increased market volatility. Additionally, the systemic implications of a bank's failure can lead to broader financial crises that can have long-lasting effects on the economy and financial markets.

 

• The relationship btw Interest rate and Bond

Bonds and interest rates are closely connected. Bonds are a type of debt security that pay a fixed or variable interest rate, known as the coupon rate, to the bondholder for a specified period of time. Interest rates, on the other hand, are the rates at which borrowers can obtain funds, and the rates at which lenders can earn a return on their investments. The level of interest rates in the market affects the price and yield of bonds.

 

When interest rates rise, the yield on newly issued bonds will also rise to reflect the increased return that investors can earn from investing in these new bonds. This creates a situation where older bonds with lower coupon rates become less attractive to investors, since they are paying a lower return than the newer bonds. As a result, the value of existing bonds decreases, since investors are willing to pay less for these bonds given their lower yield.

 

Conversely, when interest rates fall, the yield on newly issued bonds will also fall, since investors are willing to accept a lower return on their investment. This makes older bonds with higher coupon rates more attractive to investors, since they are paying a higher return than the newer bonds. As a result, the value of existing bonds increases, since investors are willing to pay more for these bonds given their higher yield.

 

The relationship between interest rates and bond prices is known as the interest rate risk. When interest rates change, it affects the price of existing bonds and can result in capital gains or losses for investors. The extent to which the price of a bond changes in response to a change in interest rates depends on the bond's maturity, coupon rate, and yield to maturity.

 

In summary, bonds and interest rates are closely connected, as the level of interest rates in the market affects the price and yield of bonds. When interest rates rise, the value of existing bonds decreases, while when interest rates fall, the value of existing bonds increases. This relationship between interest rates and bond prices is known as the interest rate risk, and can result in capital gains or losses for investors.