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Following silicon valley bank collapse, investors are still pondering why this happened and how it could influence the entire banking industry. SVB is commonly referred to as “one of the wake banks.”

SVB invested the money of its depositors in bonds which are generally considered secure. When interest rates began to rise, the bonds’ worth decreased. This forced the bank make a profit on the sale and triggered a typical bank ran.

Increased Interest Rates

The US government has assured its customers their money at SVB is safe. However, this is a stark illustration of just how fast things can go wrong.

When rumors of a negative incident began to circulate within the tight-knit group of venture capitalists, technology start-ups as well as other companies with huge amounts of cash began to swiftly remove them. Certain of the withdraws were greater than $250,000, so they weren’t covered from the Federal Deposit Insurance Corporation (FDIC).

Silicon Valley Bank Collapse made a series of ill-advised investments in bond portfolios that incurred massive losses as interest rates climbed. Withdrawal requests grew exponentially and thanks to the technology that allows rich people to withdraw money from their accounts at the touch of a button, SVB was compelled to dispose of its loss-making bond portfolio with a steep price so that it could keep up with the demand. This caused even more losses and pushed SVB to the brink of bankruptcy. This was the biggest loss for a US regional bank since 2008.

Uninsured Deposits

Like other banks, SVB puts its money into fairly safe assets, such as bonds. However, as the Federal Reserve aggressively raised interest rates to limit inflation, the SVB bonds portfolio declined in value. The bank had to purchase and borrow assets in order to get the funds required for withdraws. The classic bank run was triggered as the customers began to withdraw their cash in a frenzy.

Startups in the tech sector and businesses with deposits over $250,000 are particularly affected since their accounts are covered by the FDIC for up to $250,000. In the wake of the accelerating rate of withdrawals, SVB fast sucked the bank dry the bank, and SVB had to shut the doors. It didn’t end at that. Conservative journalists and politicians joined into the frenzy, claiming that SVB failed because of its “woke” policy. This backlash changed the conversation from risk management to one of the ideology. This bank collapse serves as an alarm about the dangers of ideologies in the context of the stability of financial markets.

Tech Start-Ups

Money is the fuel that is the driving force behind startups, despite it is the tech industry that praises the nerdy minds of its employees. Silicon Valley Bank was the 16th-largest US bank, before it collapsed, and a great storage facility for the money of startups. This bank provided loans to start-ups backed by venture capital to make up the gap which existed between their first round of funding and the raising of either debt or equity.

SVB invested part of the deposits into bonds, which are generally considered safe. However, when rates increased, those bonds lost value. It spooked depositors. Within 48 hours, spooked customers had withdrawn enough funds to force SVB to go into liquidation.

As SVB is fading away, investors are still asking themselves questions about why it went under and whether other banks are at risk. If you’ve deposited funds with SVB and are concerned about when they will get their reimbursements. If you depend on these paychecks for their rent, mortgage, or even tuition fees for kids it doesn’t look promising.

Bank Run

When a bank faces greater withdrawals than assets, the result is a prisoner’s dilemma. The bank is fine if all of its customers remain in the same place. But an influx of people withdrawing their money can cause an irreversible loss of capital.

What happened to sbv collapse? It was the 16th-largest bank in America the bank provided banking services to venture-backed tech companies. It offered loans and deposits sums of up to $42 billion.

The Federal Reserve’s rate increases triggered the bank failure and forced startups in the tech sector to take their deposits. SVB additionally invested its customers’ money into long-term bonds that lost value when inflation grew.

Additionally, SVB had less stringent regulatory requirements than midsized or regional US banks. It was capable of building a substantial bond portfolio, which was then liquidated at a significant loss in order to pay for the cash withdrawals of $42 billion.