Detail:

How does the 16th largest bank in America collapse in 48 hours? Can this happen to your bank too? I've worked in Trading Financial markets for 10 years so let me explain WHY the Silicon Valley Bank failure happened, and how it impacts YOU:

In 2022 Forbes named Silicon Valley Bank one of America’s Best Banks, and Moody's gave them an A rating. SVB has been around for 40 years and was home to half of all venture-backed startups. Now it's the biggest bank failure since 2008 and the second-largest in US history.

SVB received a LOT of deposits from startups. Its deposits tripled from 2018 to 2021. Investors gave millions to startups, and those startups deposited it at SVB. $SIVB had all this customer cash and needed something to do with it.

In traditional banking, you take deposits and make loans. The interest generated from these loans is how banks make a profit. But the customers didn’t need loans, because investors kept giving them money.

So instead of making loans, SVB took these deposits and bought bonds. They took customer deposits (checking & corporate payroll accounts) and used them to buy bonds. SVB was betting that the Fed would hike interest rates slowly, but the Fed hiked rates faster than SVB planned.

With every rate hike, the $80 billion SVB had locked up looked worse and worse. Bonds were losing value. No one wants a portfolio of bonds yielding 1.5% when the current market is selling bonds with a yield of 5%. When interest rates go up, Banks pay more interest on deposits.

Moody's issued a warning of a possible downgrade to SVB’s credit rating and this could cause investors and depositors to lose confidence in the bank. To avoid this, SVB sold its bond portfolio at a $2 billion loss to raise money, creating FUD (fear, uncertainty, doubt).

Its stock tanked over 60% Thursday, and many VC funds advised their companies to pull their deposits, which turned into a run on the bank. A bank run occurs when a large number of depositors withdraw their deposits simultaneously because they have lost confidence in a bank.

Customers can access their funds anytime, but it's unlikely that every single customer would request their funds all at once This is why banks typically only maintain a fraction of their funds, at least 10%, and then lend out the remaining deposits This is "Fractional Banking"

Fractional reserve banking is a system where banks hold only a fraction of customers' deposits in a reserve, while the rest is used to make loans or investments But it can create a bank run if too many want their funds at once. The bank won't have enough for all the withdrawals

So, Nasdaq halted trading of the stock on Friday after falling over 60% in premarket trading, as news emerged that the bank wanted to sell itself. $SIVB went from trading over $700 in October 2021 to below $50.

Less than 5% of SVB’s clients qualify for full FDIC protection. The FDIC insures deposits up to $250,000, making less than 5% of SBV’s $175B of deposits insured. Customers of the uninsured portion receive “a receivership certificate” (an IOU for any funds recovered)

To protect yourself, never keep more cash than what’s covered through FDIC insurance with a bank. If a bank fails, the FDIC steps in and pays depositors up to the insured limit. The $250,000 limit applies to each account ownership category, not to each account.

SVB paid out annual bonuses hours before its collapse. Over the last two weeks, Silicon Valley Bank executives sold millions worth of their shares. CEO sold 11% of his shares CFO sold 32% of his shares CMO sold 28% of her shares General Counsel sold 19% of his shares

Garry Tan, President & CEO of Startup Incubator YCombinator said “This is an extinction-level event for startups and will set startups and innovation back by 10 years or more.” Companies With Silicon Valley BankDeposits: $3.3B Circle $487M Roku $227M BlockFi $150M Roblox

This could create shockwaves across the economy with the payroll of thousands of employees at stake. SVB's troubles could be a sign of a new financial crisis. But Banks’ finances are in A LOT better shape now, than the last financial crisis in 2008. What do you think

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Exposition

I don't think many people understand what a big deal this is. The Silicon Valley Bank just shut down.

Their depositors money has been locked up and the government has full control.

This is the biggest bank failure since the 2008 financial crisis.

The problem is most fintech companies in Silicon Valley have used this bank for their deposits and venture capital investments.

This is going to leave a lot of tech and venture capital communities worried about where their money is going to be. Now the FDIC insurance will cover up to $250,000, but that's just chump change compared to the amount of money these businesses relied on.

Silicon Valley Bank had approximately $209 billion of assets under management and a total of $175 billion in deposits.

Make sure you follow this account right now because we're going to be covering this in a lot more in the coming days!

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