What Caused The Silicon Valley Bank Collapse

Why commercial banks buy bonds. Banks purchase government securities to add cash to their balance sheets while waiting for attractive loan opportunities to develop.
By: Winston Rowe and Associates
BLOOMFIELD HILLS, Mich. - March 11, 2023 - PRLog -- SVB Financial Group Inc's (SIVB.O) shutdown and takeover by banking regulators recently can be traced to the U.S. Federal Reserve raising interest rates and souring the risk appetite of investors.

The Federal reserve raised interest rates.

The Federal Reserve has been raising interest rates from their record-low levels since last year in its bid to fight inflation. Investors have less appetite for risk when the money available to them becomes expensive due to the higher rates.

SVP Sold Bank Sold It's Bond Portfolio at a Loss.

To fund the redemptions, Silicon Valley Bank sold on Wednesday a $21 billion bond portfolio consisting mostly of U.S. Treasuries. The portfolio was yielding it an average 1.79%, far below the current 10-year Treasury yield of around 3.9%. This forced SVB to recognize a $1.8 billion loss, which it needed to fill through a capital raise. The FDIC and Federal Bank agencies put a stop this.

Then SVB Announces a stock sale thinking no one would notice.

SVB announced on Thursday it would sell $2.25 billion in common equity and preferred convertible stock to fill its funding hole. Its shares ended trading on the day down 60%, as investors fretted that the deposit withdrawals may push it to raise even more capital. This collapsed.

SVP depositors start to notice cash crunch.

As higher interest rates caused the market for initial public offerings to shut down for many startups and made private fundraising more costly, some Silicon Valley Bank clients started pulling money out to meet their liquidity needs. This culminated in Silicon Valley Bank looking for ways this week to meet its customers' withdrawals.

Will SVP depositors get their money back.

The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. The FDIC provides separate coverage for deposits held in different account ownership categories.

The answer is not likely unless there is government bailout.

This article is prepared using open Internet sources by Winston Rowe and Associates. They are a nationwide consulting firm focused on assisting commercial real estate with financing. You can contact them at 248-246-2243 or visit them online at https://www.winstonrowe.com

Winston Rowe and Associates
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