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The Largest U.S. Bank Collapse: What happened? The Repeat of 2008 Great Depression
Silicon Valley Bank may be finished but the fallout from its collapse is only just beginning to be felt, will this lead to a banking crisis?
SVB's services were in high demand throughout the pandemic years as the preferred bank for the tech sector. The initial market shock of Covid-19 in early 2020 quickly gave way to a golden period for startups and established tech companies, as consumers spent large amounts of money on gadgets and digital services.
Many tech companies used SVB to hold cash for payroll and other business expenses, resulting in an influx of deposits. The bank invested a large portion of the deposits, as banks do. The seeds of its demise were sown when it invested heavily in long-term US government bonds, including those backed by mortgages. These were, for all intents and purposes, as safe as houses.
However, bonds have an inverse relationship with interest rates; as rates rise, bond prices fall. As a result, when the Federal Reserve began to raise interest rates rapidly in order to combat inflation, SVB's bond portfolio began to lose significant value. If SVB can hold those bonds for a number of years until they mature, it will receive its capital back. However, as economic conditions deteriorated over the last year, particularly in the technology sector, many of the bank's customers began withdrawing funds from their deposits.
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