After the historic collapse of Silicon Valley Bank, the US government took extraordinary measures on Sunday. To avert a banking collapse assuring all depositors at the failed institution. That they could rapidly access all of their money, even as another significant bank was shut down.
The Silicon Valley Bank (SVB), which dubbed itself the “financial partner of the innovation economy” . After experiencing a quick collapse, was shut down by US banking authorities on Friday. It has shocked both the financial and technology sectors. Although the bank served a very specialized clientele of start-ups, VCs, and tech companies, SVB was the 16th largest bank in the US prior to its demise.
Additionally, it was the second bank to collapse last week after Silvergate. The US banking authorities then shut down the Signature Bank on Sunday, making it the third bank to shutter in a week.
It’s interesting to note that this is the second-largest bank collapse in US history and the first one since the Great Recession of 2008. Washington Mutual Bank had previously failed in September 2008. It had $188 billion in savings and $307 billion in assets. SVB possessed assets worth $209 billion and deposits worth $175 billion just before it collapsed.
What Happened
Silicon Valley Bank was thriving. Credit losses are fairly low , Its deposits tripled from 2019 to 21. When banks accept deposits from clients, they owe the client that money. So deposits are liabilities to the bank. Liabilities cost money ….”cost” both to serve those clients (branches, tellers etc.) and any interest the bank pays you on your checking account. To pay for the cost of those liabilities, banks turn them into assets: lending deposits as small business loans, mortgages etc. If a bank can’t lend deposits responsibly, it often uses excess to buy loans or securities, like US Treasuries and Mortgage Backed Securities.
From 2019-2021, the deposits tripled! SVB needed to take those funds and acquire “assets” to pay its costs.
What about the deposits
The Biden administration stated that Silicon Valley Bank depositors will have access to their money. Starting on Monday in a move intended to safeguard the US economy by boosting public trust in the nation’s banking system. No losses associated with the resolution of the Silicon Valley Bank (SVB) will be borne by the taxpayer,” said a joint statement issued by the Department of the Treasury, Federal Reserve, and FDIC.
The same systemic risk exception is being announced for Signature Bank, New York, New York. Which was shut down by its state chartering authority today. This organization will make whole all of its depositors, it stated.
What to expect
Silicon Valley Bank collapse, 1 lakh to be fired, more than 10,000 startups likely to be affected
Roughly 10,000 small firms with accounts in Silicon Valley Bank may be impacted in a petition it submitted to the US government. Also, it is possible that up to 1 lakh jobs may destroyed, which would result in extremely high unemployment. This may potentially have an impact on a few startups.
Silicon Valley Bank has more than 37,000 small businesses with deposits totaling more than USD 250,000, according to the NVCA. The bank, however, is no longer able to utilize this sum. The FDIC is in charge of it, and it will act as a receiver for many years.
