Array
When Silicon Valley Bank, collapsed on Friday, it created the second-largest bank failure in US history.
Here’s how it all came tumbling down:
As the bank grew to be the 16th largest in America, SVB invested their funds in long-term bonds when rates were near zero.
This may have seemed like a good idea at the time, but when interest rates rose those long-term bond prices fell, cratering their investments.
On Wednesday, SVB announced that it suffered a $1.8 billion after-tax loss and urgently needed to raise more capital to address depositor concerns.
The market reacted sharply and SVB lost over $160 billion dollars in value in 24 hours.
As the stock fell, depositors moved quickly to withdraw money from the bank.
Banks only carry a fraction of depositors’ money in cash – called a fractional reserve. This meant that SVB couldn’t give depositors their money because it was held in those long-term bond investments that were no longer worth as much.
In short, SVB didn’t have the cash they needed to fulfill their obligations to their customers. As panicked withdrawal continued, a bank run was well-underway.
