Silicon Valley Bank, which declared bankruptcy almost overnight, is described as the second-largest bank failure in the USA. In this article, we explained the Silicon Valley Bank and its breaking point and its impact on the market and the world.
Silicon Valley Bank
Silicon Valley Bank was founded in 1983 and since its inception has focused on the needs of investors, venture capital and startups. It provided banking services focused on the needs of early-stage startups, series A, B and C startups, and lastly, late-stage startups.
Being the 16th largest bank in the USA, it had a wide portfolio of customers from angel investors to entrepreneurs, from venture capitalists to individual customers.
Sudden Breaking Point
The overnight crash began after Silicon Valley Bank ("SVB") announced a loss of $1.8 billion from the sale of long-term bonds on March 9, 2023.
SVB has purchased billions of dollars of long-term bonds over the years to capitalize on the money its clients have invested in them. Due to the fact that long-term bonds are safe investments, the evaluation of investments came to the fore and SVB took the safe road which other banks pursued in general.
However, the COVID-19 pandemic and the economic depression brought about by the US midterm elections, albeit on a smaller scale, increased its impact with the increase in raw material prices, the increase in demand day by day, and the inability of the companies providing the supply to produce enough. This naturally affected the banks, and in the concrete case, the SVB.
After the US decision to raise interest rates, the yield on long-term bonds with lesser yields fell significantly, resulting in a loss of SVB $1.8 billion from the sale of these bonds.
On March 9, 2023, in terms of SVB, whose shares fell by 60% after the announcement of this loss by the SVB, some VCs suggested to startups and investors to take their money in SVB. Considering the rapid nature of the startup ecosystem, it was not a problem at first for investors and entrepreneurs to withdraw money from their accounts at SVB, but later on, SVB started selling its own assets to meet the customer's request for withdrawal. Sales to meet demand, which at first did not seem like a problem, caused SVB to go bankrupt. In about 24 hours, it lost $160 billion in value, again with the quick reaction of the market.
On March 13, 2023, the US Federal Deposit Insurance Corporation ("FDIC") transferred all assets of SVB's clients to Silicon Valley Bridge Bank, N.A. He established a "bridge bank" under his name to protect depositors. The bank's transactions were transferred to the FDIC.
Effects of SVB Failure
Signature Bank emerged as another concrete example of how banks affect each other with the ripple effect in the financial sector. After the bankruptcy of the SVB, Signature Bank, which serves especially real estate companies, law firms and crypto money companies, ceased all operations by the FDIC on March 13. While this was seen as the government's effort to prevent the crisis in the banking and financial sector, it was emphasized that the crypto industry constitutes 30% of the deposits at Signature Bank.
At the same time, it should be noted that besides Signature Bank, there are speculations about whether the same situation will occur in terms of other banks.
Finally, the bankruptcy of Silicon Valley Bank, which mainly has special services for investors and entrepreneurs and is focused on the startup ecosystem, seems to prove the importance of risk management to entrepreneurs. Again, bankruptcy demonstrates with a real-life example the lesson that while startups are high-risk investments, risk management and market analysis-based foresight should be the focus.
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