Silicon Valley Bank Failure Raising Fears Everywhere.
Cristal M Clark
What Happened to the 16th largest US Bank?
Silicon Valley Bank (SVB), had $210 billion in assets, yet was seized by California regulators on Friday after depositors (customers) rushed to withdraw funds over concerns the bank might become insolvent.
I get it, but how could that be possible?
Well, while yes deposits came in, SVB invested in debt like U.S. Treasuries and mortgage-backed securities.
The bank bought billions of dollars worth of bonds over the past couple of years, using customers’ deposits which is precicley what banks normally do. These investments are typically safe, but the value of those investments fell because they paid lower interest rates than what a comparable bond would pay if issued in today’s higher interest rate environment. Unless you are looking at what happened here, you see when the Federal Reserve began to increase interest rates to combat inflation, the value of SVB’s investments fell and they failed to raise profits in another way.
So, in short SVB had been hit hard by the downturn in technology stocks over the past year, SVB’s customers were largely startups and other tech-centric companies that started becoming needier for cash over the past year. Venture capital funding was drying up, companies were not able to get additional rounds of funding for unprofitable businesses and therefore had to tap their existing funds which had been deposited with SVB, who was huge within the tech startup universe.
So, SVB customers started withdrawing their deposits. Not a big deal at the beginning but, the withdrawals started requiring the bank to start selling its own assets to meet customer withdrawal requests. Because SVB’s customers were largely businesses and the wealthy, they likely were more fearful of a bank failure since their deposits were over $250,000, which is the government-imposed limit on deposit insurance. In laymen’s terms, the Federal government insures deposits to $250,000, but anything above that level is considered uninsured.
Sadly, as of right now, all of that money can’t be accessed and likely will have to be released in an orderly process. But many businesses cannot wait weeks to get access to funds to meet payroll and office expenses. It could lead to furloughs or layoffs.
That’s why they say the more money you have, the more important it is for you to deposit it into different financial institutions and investments. Don’t put all of your eggs in one basket.
What this did was cause a ripple of fear in a the size of a wave the likes of a tsunami. Banks freaked out, customers freaked out, didn’t matter if they did business with SVB, everyone freaked out.
US President Joe Biden was busy ensuring that our banking industry is safe, whilst many pointed the finger at the Fed who has failed to wrangle in inflation, all the Fed has done is continue to increase interest rates, which is not how we fix the inflation problem, as you can all clearly see.
The other problem here is that the public and the White House seem to agree, no fucking bank bailouts this go around. Look, SVB failed because they did not raise the funding they needed in order to continue to operate, they were relying on customer deposits which means if the Government had not stepped in anyone who had deposits in SVB would have been fucked worse than they are right now. One of the oldest ways to fail a bank, customer deposits belong to the customer not the bank.
The White House could care less about SVB, they have vowed to take care of the customers, not the bank.
Then we have the Federal Reserve, news just broke that the Fed is not going to raise interest rates this month. But lets be completely honest here, the notion of raising interest rates in an effort to slow the economy is an outdated and old way of thinking. It isn’t working. It’s as if the Fed is blind and stupid, now is not the time to send the country into peril and continue fucking about with interest rates. Get your lazy arse back to the drawing board and find another way to fix inflation. Yes that means making wealthy enemies, it’s about time that the United States Government started to answer for its glaring favouritism practices by rewarding rich donors and punishing the working class.
You work for us after all, and last time I checked we outnumber the wealthy.
Cristal M Clark
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