Quote:
Originally Posted by Tyga11
I read that article earlier. Still doesn't make any sense to me
|
The gist of it is that SVB suffered a bank run.
This was for two reasons: 1) it was paying too-low rates on deposits, having placed a substantial portion of those deposits in low-rate, long-dated US Treasuries and mortgage bonds BEFORE the Fed started inexorably raising rates; and, 2) the bank's depositors were heavily skewed towards Silicon Valley startup founders who wanted their deposits back, either to get higher returns elsewhere or to deal with business issues in an economy no longer as enamored of tech startups as it recently was (esp. from mid-2020 to early 2022).
-----------------------------
"Silicon Valley Bank’s...troubles have been brewing for more than a year. Founded in 1983, the bank, based in Santa Clara, Calif., was a go-to lender for start-ups and their executives."
"Though Silicon Valley Bank advertised itself as a 'partner for the innovation economy,' it was being shaken by decidedly old-fashioned decisions. To compete with bigger names, it had long boasted of looser lending standards for fledgling companies, and offered to pay higher interest rates on deposits than its larger rivals."
"Flush with cash from high-flying start-ups, it bought huge amounts of bonds more than a year ago, just before the Federal Reserve began to raise interest rates. Like its peers, Silicon Valley Bank kept just a fraction of the deposits on hand and invested the rest with the hope of earning a return."
"In particular, the bank put customer deposits into long-dated Treasury bonds and mortgage bonds which, while interest rates were low, promised modest, steady returns."
"That had worked well for years."
"When the Federal Reserve began raising rates last year, however, those holdings became less attractive because newer government bonds paid more in interest. That might not have mattered so long as the bank’s clients didn’t ask for their money back."
"But at the same time as interest rates were rising, the environment for start-up funding dried up, putting pressure on the bank’s clients — who then began to withdraw their money. To pay those redemption requests, Silicon Valley Bank had to sell off some of its investments at exactly the wrong time. In its surprise disclosure on Wednesday, the bank admitted that it had lost nearly $2 billion when it was all but forced sell some of its holdings."
“'It’s the classic Jimmy Stewart problem,' said Sheila Bair, former chair of the Federal Deposit Insurance Corporation, a primary bank regulator... 'If everybody starts withdrawing money all at once, the bank has to start selling some of its assets to give money back to depositors.'”