Silicon Valley Bank (SVB) collapsed late last week.
What does this mean?
SVB is a heavyweight in the US startup arena, with almost half the country's venture-backed tech and life sciences startups among its clientele. But lately those businesses have been burning through cash reserves in order to stay afloat – and that means SVB’s once-brimming deposit pool evaporated to little more than a puddle. The bank responded to that problem with the bright idea of selling off some bonds to raise cash: problem is, SVB bought those bonds when tech was at its height, and their value’s plummeted as interest rates have climbed. The end result, then, was a sizable loss for SVB. That sparked worries the bank was running out of cash – sending shares plummeting – and when a share sale intended to fix the balance sheet failed, SVB wound up in regulators’ hands.
Why should I care?
Zooming in: A run for their money.
Even if it had somehow managed to raise the cash, the writing was probably already on the wall for SVB: the initial loss had spooked clients, with VC firms advising companies to consider withdrawing cash from the lender. And remember “It’s A Wonderful Life”? When anxious customers all try to pull their cash at the same time, you’ve got a classic bank run on your hands. All said, then, SVB wound up as the US’s second-biggest bank failure ever.
The bigger picture: Safety in size.
The whole debacle caused a ripple effect in finance, with the four biggest US banks collectively shedding over $50 billion in market value on Thursday. After all, the US banking industry has over $600 billion in so-called paper losses – ones that only materialize when sold, like SVB's bonds. But America's top banks aren't really expected to go belly up: proportionately, they’ve got a whole lot less bound up in similar, troublesome investments, and that means that they’re much safer.
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