The Silicon Valley Bank became the biggest US banking failure since the financial crisis in 2008. Here’s all you need to know about it.
What is the Silicon Valley Bank crisis?
The global financial and banking stocks took a massive hit on Friday following the shutdown of the Silicon Valley Bank (SVB) group by US regulators. The aggressive decline led to a loss of over $80 billion, stranding billions of dollars belonging to depositors, companies, and investors. The SVB crisis unfolded in about 48 hours following the announcement that it was trying to raise funds over $2 billion for plugging gaps in its balance sheet. This caused widespread panic among its depositors and clients in addition to triggering a huge selloff.
The lender is currently been put under the US Federal Deposit Insurance Corporation (FDIC)’s control. Following the failure at fundraising, the SVB group also tried to sell itself. However, it did not work out as depositors were moving “very quickly”. The group also asked its employees to work from home until further notice. The Silicon Valley Bank collapse and crisis may have unfolded in just two days. However, analysts believe it was another victim of the sustained high interest and fear of more hikes this year.
More on the crisis
Following the period of low-interest rates during the covid pandemic, banks around the world started aggressively raising key rates to tackle the rising inflation. For large tech and start-up lenders such as the Silicon Valley Bank, this was a huge hit. With higher interest rates, clients started pulling out and this sent SVB scrambling to look for ways to meet the withdrawals.
“I think the Fed badly miscalculated the impact of rising interest rates and so these are self-inflicted wounds and if we see more banks fail. Then the Fed is faced with a very tough situation which may force them to drop interest rates,” stated Christopher Whalen. Whalen is the Chairman of Whalen Global Advisors. “There could be a bloodbath next week as banks are in trouble. The short sellers are out there and they are going to attack every single bank, especially the smaller ones. I think Silvergate started it. That one was the first pebble to go off the mountain. And now we have a boulder and more are likely to follow,” he added.