UPSC IAS PRELIMS 2023 | INDIAN POLITY | English (Best Guide)
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Silicon Valley Bank's collapse due to risky investments caused panic among tech startups. The government and FDIC have taken measures to address the situation, but the tech sector may still suffer long-term impacts.
US Banking Crisis: The Truth Behind The
Disaster
ColdFusion
Silicon Valley Bank CollapseThe collapse of Silicon Valley Bank led to
widespread panic not witnessed since the financial meltdown of
2008. The Federal Deposit Insurance Corporation (FDIC) has since
taken over control and guaranteed customers access to up to
$250,000 on Monday.During the pandemic in 2020, the bank
enjoyed a healthy period of growth due to low interest rates and
excessive money printing from the US Federal Reserve. Tech
startups were able to raise money easily due to cheap credit.
However, nearly 50% of all US startups have some deposits in the
bank, and this proved to be a problem.The bank wanted to make a
larger profit from the cash they were sitting on, and long-term bonds
seemed like a safe investment. This led to an increase in demand
for these bonds and their price. Meanwhile, tech startups were
struggling to get financing as credit dried up, and they needed to
dip into their cash to fund their operations. The bank had enough
liquidity to deal with these withdrawals initially but eventually gave
in.On March 8, 2023, the bank made a bombshell announcement
that they were selling off their entire liquid bond portfolio worth over
$21 billion. This resulted in a $1.8 billion loss in the sale. To recoup
some losses, management decided to raise some capital. However,
this proved to be a grave error.
Silicon Valley Bank's senior management made a mistake by
investing short-term deposits in longer-term fixed-rate assets. To
minimize their losses, the bank could have started to exchange their
long-term Treasuries for bonds yielding higher interest rates.
However, the CEO, CFO, and CMO sold $4.4 million worth of
company stock just weeks before the bank's decline. The stocks of
First Bank Republic and Westpac Bancorp have also seen significant
declines, some as much as 66% in a day. Many hedge funds have
also started to short sell, making it the worst week since
2020.Unfortunately, this week is not starting out any better,
although depositors of Silicon Valley Bank and Signature Bank will
be made whole. The US government's Federal Reserve and financial
sectors have devised a solution, which we will discuss shortly. The
tech sector will experience the most pain. The current financial
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