Last week Wall Street panicked because of Silicon Valley Bank bankruptcy (SVB) due to lack of liquidity and insolvency, in the midst of suspicions about its CEO and the terror that trouble would spread throughout the entire financial system of the United States.
As reported The New York TimesUS regulators announced this Friday the closure of the bank and announced measures to guarantee the protection of all its insured deposits to avoid panic in the financial markets.
What was Silicon Valley Bank?
This financial entity specialized in startups investing in nascent projects. According to information from the Federal Deposit Insurance Corporation (FDIC), Silicon Valley Bank had 17 branches in the states of California and Massachusetts. At the end of 2022, it had assets worth about $209 billion and had received $175.4 billion in deposits.
Silicon Valley Bank was founded 40 years ago and had specialized in serving tech start-ups that couldn’t access loans from big banks. Even a few days ago it was competing for the title of Bank of the Year.
Why did SVB go bankrupt?
In simple words, the bank took billions of dollars that it had on deposit and placed it in long-term US Treasury bonds, thinking that interest rates would not change. However, the record inflation facing the United States caused the Federal Reserve (FED) to make one of its strongest monetary tightening in its history and said Treasury bonds lost much of their value.
On Wednesday, March 8, the bank announced that it was going to seek a capital increase to try to face its financial difficulties, since it had lost 1.8 billion dollars in investments. In addition, it reported that it would get rid of 21 billion dollars injected into other projects.
This raised concerns about the bank’s stability and prompted investors, venture capital firms and clients to withdraw their money, plunging Silicon Valley Bank’s market value. This illiquidity and insolvency represented the largest failure of a US bank to fail since 2008.
How did the United States come to the rescue?
The fall caused fears in the world banking sector in general, for which the US Treasury Secretary, Janet Yellen, had to leave statements to calm the panic, assuring that the country had “effective tools” to face the Silicon Valley Bank bankruptcy.
On Friday, March 10, the California Department of Financial Protection, where the bank was headquartered, took possession of SVB and transferred management of its assets to the FDIC.
In a press release, the agency reported that it took measures to protect deposits so that all customers can have access to their money on Monday at the latest. For those who have deposits not guaranteed by the federal authorities, the FDIC will deliver a dividend the following week and a certificate for the rest of the funds that will be delivered as the bank is sold.
Why is the entire financial world scared?
As explained by the Democratic representative Jeff Jackson in his TikTok account, the US Congress had an emergency meeting by Zoom called by the country’s Treasury. This extraordinary meeting was to agree on the steps to be followed by the authorities to secure the US financial system.
According to Jackson, deposits in US banks are generally insured if they are for less than $250,000. But most of Silicon Valley Bank’s clients had much more in their accounts because they were mostly startups and small businesses.
The fear of what would happen to those deposits began to “infect” other banks. Several banks are already raising red flags as people are moving their money out of small banks and into larger financial institutions.
The deposits will be paid with an insurance that the banks already contract with the government to prevent thousands of businesses from having to close due to choosing the wrong bank.
The idea of Congress is to stop the domino effect and prevent the panic from spreading to other banks and causing a financial disaster.
@jeffjacksonnc Rep. Jeff Jackson (NC): Stopping a bank run #fyp #nc #charlotte #raleigh #greensboro #asheville #durham ♬ original sound – Jeff Jackson
Joe Biden tries to calm the waters
This morning, the American president Joe Biden gave a message to the population ensuring the stability of the nation’s banking system in an attempt to stop the panic and its domino effect caused by Silicon Valley Bank and that this Sunday led Signature Bank to bankruptcy.
Biden said at a press conference that his administration would do what is necessary to avoid consequences for small businesses, jobs and the banking system in general from the problems.
“The management of these banks will be fired. If the FDIC takes over the bank, the people who run it should not work there again,” the president said, noting that the bank’s investors will not be protected. “They knowingly took the risk and when the risk didn’t work out for them, investors lost their money. That’s how capitalism works.”
Did the CEO of SVB know what was going to happen?
After the US government took control of the bank, the eyes of analysts and authorities have turned to Greg Becker, the CEO of Silicon Valley Bank.
As reported BloombergTwo weeks ago Becker sold 3.6 million shares of the bank. The executive presented the plan that allowed him to sell the shares on January 26, and according to regulatory documents, the sale of 12,451 shares on February 27 marked the first time in more than a year that Becker had sold shares of parent company SVB Financial. Group.
On Wednesday, Becker reached out to the Silicon Valley bank’s big clients, starting the run on the bank that sent investors pulling $42 billion in less than 24 hours.
Becker joined the ranks of SVB in 1993 as a financing specialist for fast-growing technology companies. He helped found SVB Capital, the arm that ran the bank’s venture capital funds and direct investment funds. He had been its chief executive since 2011.
Both Becker and SVB have not yet responded to press inquiries regarding this share sale, whether there was an intention in this exercise or whether it was simply a temporary coincidence. However, the ex-CEO was “removed” from the board of directors of the San Francisco Federal Reserve that same Friday. He was a Class A director since 2019 and his departure leaves a vacancy on the 9-member council.
Editorial Team The editorial team of EMPRENDEDOR.com, which for more than 27 years has worked to promote entrepreneurship.