Why did the Silicon Valley Bank Shut Down

On 10^th March 2023, the Silicon Valley Bank (SVB) was taken over by the U.S Government sending shock waves around the world especially in financial markets. The bank’s closure was the largest one since 2008. To safeguard its depositors, The California Department of Financial protection and Innovation appointed Federal Deposit Insurance Corporation (FDIC) as its receiver.

What was SVB ?

The SVB was a California based bank founded in 1983 and catered mainly to Silicon Valley startups. The tech industry was the biggest customer of SVB. It catered to nearly half of the venture backed startups in U.S. Apart from this, various other SAAS (Software as a Service) firms from across different countries had accounts in SVB. Its main clients also included various venture capitalists and private equity firms.

What happened?

What led to the fall of SVB wasn’t just one factor but a culmination of a number of factors working together. Firstly, the SVB dealt with a specialised type of lending i.e., lending to tech entrepreneurs and startups, venture capitalists and private equity firms. It also catered to technology start-ups facing shortage of equity funds.

These tech entre which got a lot of funding from venture capitalists and private equity firms. Many venture capitalists and private equity firms which were clients of the SVB provided funding to these tech startups, many of which also parked their funds in the SVB. During the covid, in order to give a boost to the economy, the interest rates were kept low. These low rates of interest made funding easy for the tech firms. Many of the startups as a result put these large funds in SVB. Hence, the SVB collected large deposits during this funding boom in 2021. The bank invested these deposits in bonds issued at a low-interest rate that time.

However, as the pandemic condition improved and the economies started opening up, the tech companies started experiencing a slowdown due to uncertainties in the global market. This led to a fall in funding to the tech startup firms leading to a slowdown in the tech sector. With the Russia-Ukraine war in early 2022, the U.S economy started experiencing inflation. As a response to it, the U.S Federal reserve started raising the interest rates in 2022. The rising interest rates, brought down the value of those bonds. As the value of bonds fell, the bank started selling them to cover its losses. As the word spread, the startups and tech-firms having deposits in SVB panicked and started withdrawing their funds from SVB. This led to a mismatch in the assets and liabilities of the bank. On 8^th March, it was announced by the bank that it had sold $21 b worth of bonds at a loss of $1.8 b. When the news further spread, depositors ran to take out their money leading to a further fall in deposits. Thus, forcing the government to take over the bank.

Understanding Trade-Offs in Economics: Balancing Choices for Optimal Outcomes

TRADE-OFFS Economics is concerned with people making decisions. However, these decisions are not always easy to make as making a decision involves making a choice. This choice may be between different alternatives/goals/options. Generally, choosing one goal means not being able to choose the other one. This results in what we call a trade-off where in order to choose one thing we have to let go or sacrifice the other one. Examples of Trade-Offs: P eople face numerous trade-offs in their daily lives. Let’s say a person wants to reach his office. He may either go by car or bicycle. Going by a bicycle is not only environmentally friendly but also is a good exercise. However, going by a car will save time and make him reach faster. This is a situation of trade-off where the person has to choose an option and in choosing one, he will be giving up the other one. A family which has a limited monthly budget has to decide whether to spend that money on a vacation, saving for their chil

What are Consumer Goods, Capital Goods and Intermediate Goods? With Examples

Consumer Goods, Capital Goods, Intermediate Goods After the production of a good or service, the next aim of the producer is to sell the good to the consumer. The consumer can be an individual or a firm; and the good when sold to the consumer can be consumed as it is or the good can be transformed into another good with the help of a productive process such as a machine. For example, when wheat is sold to a flour mill, it is converted into flour through the use of machinery. When a good is transformed into another good like in the case of wheat, it loses its specific characteristic during the production process. Such type of a good is known as intermediate good. When the goods are not further transformed into other goods, and are used as it is, it is known as final goods. So, the final goods are those which do not pass through any further production process or transformation and are used as it is by the consumers. The final goods can be of two types- Consumer goods and Capital

Consumer's Equilibrium using Marginal Utility Analysis

The Law of Diminishing Marginal Utility It has been observed that the desire to consume a commodity decreases as more and more units of that commodity are consumed. Therefore, every successive unit of the commodity consumed provides lesser utility than before. The Law of Diminishing Marginal Utility states that as more and more units of a commodity are consumed, the Marginal Utility derived from every successive unit of the commodity declines. This happens because psychologically, as a consumer starts to consume one unit of the good after another, the the consumers satisfaction reaches a saturation point. So, with every successive unit consumed, the additional utility the consumer derives goes on declining. Consumer's Equilibrium using Marginal Utility: Cardinal Analysis Consumer's equilibrium is that level of consumption at which the consumer is getting maximum satisfaction (benefit) while spending out of his given income across different goods and services, and has no tende

Easy on Economics

Search This Blog