How SVB failed?
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Failure of banks are common. In case of SVB after global financial crisis of 2008 US fed followed easy monetary policy. And economy shifted to digitized economy and because of pandemic digitized economic growth accelerated. So it was a significant boom for technology companies. SVB benefited from this boom and opened offices across the world. It has its office in Bangalore also. SVB appeared in Forbes best US bank list repeatedly.
End of easy money policy will have large impact on world economy and financial market. It affected the banks also. So getting money in the market was difficult. For VC and smaller technology companies the easy money available started to dry up. Already recession and Ukraine war has impacted financial market. Now US based Silicon Valley Bank (SVB)has shut its operations in the week end .Let us see the reasons behind SVB’s failure and its impact.
SVB is based in California and funds mostly technology companies. Its depositors are also from technology sector and lends mostly to innovation based firms and claims it as financial partner of the innovation economy.
Banks normally fail because of taking short-term deposits and funds long term projects. In case short term depositors rush back to get back their money banks will get into trouble. As the banks can not call back the long term loans easily. In case of financial crisis normally depositors try to get back their money. In that case banks bound to fail.
SVB’s capital ratio as per annual report for 2022 was 16% which is much higher than required 10%. On 8th March 2023 one of the funds run by leading VC Peter Thiel has asked to withdraw from SVB. This news spread like wild fire and depositors started to withdraw funds. SVB informed, it has enough liquidity and arranging capital from global investors. But with in two days ,that is by 10 th March SVB has failed.(note : please use this article after verifying facts)
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