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Why Silicon Valley Bank, a tech startup darling, collapsed and how US govt saved depositors

SVB collapse was a circle of deposit withdrawals leading to fears of a bank run, which then resulted in a bank run. The US regulators have, however, stepped in quickly.

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New Delhi: Three days after the collapse of the Silicon Valley Bank caused panic among its depositors, startups, and the American banking system as a whole, the US government and regulators have intervened with decisive steps.

These actions have taken the form of an assurance that depositors will have access to their money, and the creation of a new fund to help out ailing financial institutions in the future. 

The Federal Reserve Board, which is the board of the US’s central bank, said Sunday that it would be making additional funding available “to help assure banks have the ability to meet the needs of all their depositors”.

The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP)… will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress,” the Federal Reserve Board said in its statement.

It said that it had taken the approval of the US treasury secretary to make available $25 billion from the Exchange Stabilization Fund — an emergency reserve that can be used to mitigate instability in various financial sectors — to act as a backstop for the BTFP. 

However, the statement added that the Federal Reservedoes not anticipate that it will be necessary to draw on these backstop funds”.

The same day, Treasury Secretary Janet Yellen, Federal Reserve Board Chair Jerome Powell, and Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg issued a joint statement.

“After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors,” the statement read. 

Depositors will have access to all of their money starting Monday, the statement said, adding: “No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer”.

On his part, US President Joe Biden has promised to hold the people behind the banking crisis “fully accountable”. In a speech Monday, Biden said: “Americans can have confidence that the banking system is safe. Your deposits will be there when you need them.”

However, he added that the managers of the bank would be fired and that investors would lose money since “they knowingly took a risk, and when the risk didn’t pay off (they) lose their money. That’s how capitalism works”.

He further said that he was going to ask the Congress and the banking regulators to strengthen the rules for banks and ensure that a failure like this doesn’t get repeated.

Meanwhile, HSBC Holdings announced Monday that its subsidiary — HSBC UK Bank — was acquiring SVB’s UK arm, Silicon Valley Bank UK Limited, for just £1. 

What chain of events led the US President, treasury secretary, and chairman of the board of the US central bank to all get involved in trying to help the depositors of a bank that, until less than even a week previously, was in sound financial health? And what led to the second-largest banking collapse in US history, and the largest since the Global Financial Crisis of 2007-08? Read on to find out.


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The start of a bank run

SVB was the 16th largest bank in the US and was most widely known for lending to tech startups, including big companies like Pinterest Inc, Shopify Inc, and CrowdStrike Holdings Inc. 

Last Wednesday, the bank announced that it was raising $2.25 billion from a share sale and that it had also sold $21 billion worth of securities from its existing portfolio. 

The bank said it had needed to do this to raise cash due to its falling deposits. 

The deposits themselves had been falling because startups in the US were dipping into their savings to tide over the ongoing ‘funding winter’ — an extended period of reduced capital inflows to startups.

At the same time, it emerged that SVB had invested a large proportion of its deposits in bonds that it had bought when interest rates in the US were relatively low. With the US Federal Reserve consistently hiking interest rates, by 450 basis points since early 2022, the value of these bonds began to fall sharply. 

What this meant was that when the time came for SVB to sell these bonds to raise funds, it had to do so at a loss. 

A day after its share sale announcement, SVB’s parent company — SVB Financial Group — registered a 60 per cent fall in the stock price. 

Simultaneously, the news of SVB’s dire straits triggered a full-fledged run on its deposits — that is, big venture capitalists and startups, afraid of a mass withdrawal of deposits that could leave them locked out, began to do exactly that, creating the very bank run they had feared.

The company’s stock price continued to fall sharply Friday, leading to trading being halted

“Despite the bank being in sound financial condition prior to 9 March, 2023, investors and depositors reacted by initiating withdrawals of $42 billion in deposits from the bank on 9 March, 2023, causing a run on the bank,” SVB said in a regulatory filing on 10 March. “As of the close of business on 9 March, the bank had a negative cash balance of approximately $958 million.”

The end of the bank

The FDIC announced Friday that the California Department of Financial Protection and Innovation was shutting down the SVB and that depositors would have access to their insured deposits over the next few days.

“To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB),” the FDIC said in its statement. “All insured depositors will have full access to their insured deposits no later than Monday morning, 13 March, 2023.”

According to the latest rules of the FDIC, depositors can be insured for up to $250,000 worth of deposits.

However, according to the joint statement issued by the treasury secretary, Federal Reserve Board chair, and FDIC chairman Sunday, depositors would have access to all of their deposits and not just to the insured sum.

Meanwhile, although the SVB has reportedly invested in some Indian startups, the quantum of these investments is as yet unclear, making it difficult to ascertain how large or small the impact will be here. 

(Edited by Uttara Ramaswamy)

Also Read: Why Bengaluru isn’t losing any sleep over Delhi becoming India’s ‘startup capital’


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