Why Did Silicon Valley Bank Collapse?

Mumtaz Moosa | mumtazs@icloud.com
15:03:2023 | 10:00 AM CAT
1 min read

Photo Credit: NZ Herald

The bank’s name alone would tell us that the bank’s businesses were centred on tech start-ups in the United States of America.

During the COVID-19 pandemic, banks saw an influx of deposits as tech companies made a roaring trade around people stuck at home.

Silicon Valley Bank invested a large sum of money in US government bonds, traditionally considered one of the safest investments for banks. SVB issues started 12 months ago when the US Federal Reserve started raising interest rates in response to soaring inflation, which caused the bond value to drop drastically.

As economic conditions for tech start-ups strained following the pandemic boom, many SVB clients started to pull funds to stay afloat. SVB was forced to sell bonds at a loss, and within 48 hours of rumours circulating about the banks, financial health funds were drawn out, causing the banks to collapse.

Experts suggest that the fall of SVB occurred due to a rookie mistake in which the bank invested short-term deposits into a long-term bond, the same phenomenon that wiped out the US Savings and loans industry in the 80s.

Silicon Valley Bank is the 16^th largest bank in the US.

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