Good morning! Silicon Valley Bank, the second-largest bank in the US by assets, has collapsed. Here is a deeper look at what happened.

FINANCE

The Silicon Valley Bank Collapse

Let’s break down what happened to SVB over this past week:

Silicon Valley Bank, a significant lender to the technology and startup industry, collapsed on Friday.

SVB Financial, the parent company of Silicon Valley Bank, experienced a significant increase in deposits during the pandemic due to the influx of cash from its startup and venture capital clients.

In just two years, the company's deposits increased from over $60 billion in Q1 of 2020 to nearly $200 billion in Q1 of 2022. However, to handle this massive amount of cash, SVB Financial purchased what appeared to be safe assets, such as U.S. Treasuries and government-backed mortgage securities.

Unfortunately, due to the increase in market interest rates, the value of these fixed-interest assets on the open market has decreased, causing the company to lose over $17 billion.

In addition to the asset loss, SVB Financial has also experienced outflows of deposits as clients have been spending more than they earn. To attract new deposits, the company has had to offer higher rates due to the Fed's hikes, which has become more expensive. As a result, deposits decreased from almost $200 billion at the end of March 2022 to $173 billion at the end of the year.

On Wednesday, SVB Financial announced that it had sold securities at a loss to reset its interest earnings and to have balance-sheet flexibility to meet potential outflows and fund new lending. The company also planned to raise $2.25 billion in capital. However, this announcement caused the company's stock to plummet, making it difficult to raise capital, and the bank had to cancel its share-sale plans.

On Thursday, customers tried to withdraw $42 billion of deposits from the bank, which is about a quarter of the bank's total deposits, causing the bank to run out of cash. Many of the bank's deposits are substantial enough that they do not have Federal Deposit Insurance Corp. protection, and so the FDIC is working to ensure that customers have access to their insured deposits as soon as possible.

The recent demise of Silvergate Capital and the effects of increased interest rates on banks' securities have resulted in investors selling bank stocks. This situation has prompted inquiries into which banks miscalculated the alignment between the cost and duration of their deposits and the yield and timeframe of their assets.

According to a statement from the FDIC on Friday, insured deposits of customers will be fully accessible by Monday morning, and uninsured depositors will receive an advance dividend within a week, followed by a "receivership certificate" for the remaining amounts, potentially receiving future dividend payments as the bank's assets are sold off. How long the asset sale process will take, and its impact on depositors is still being determined.

Finally, several questions remain as impacted employers race to secure funds from investors and alternative sources to guarantee uninterrupted operations and payroll.