FINANCIAL EDUCATION FOR YOUNG PEOPLE šØāšš©āš
Here's what happened
Silicon Valley Bank (SVB), was the darling bank for tech start-ups and as of 2021 had $190 billion in customer deposits.
Well over 50% of Venture Capital (VC) funded tech start-ups banked with SVB.
But last year, SVB bought $80 billion in Mortgage-Backed Securities (MBSs), which initially attracted investors, until the Federal Reserve in the US (the equivalent to the Bank of England) increased its own rate of return on government bonds.
Which ultimately offered a higher rate of return than SVB's rates plus lower risks (as US government bonds are historically considered 'risk-free').
It was a no-brainer, investors voted with their deposits and started transferring cash from SVB to government bonds.
Consequently, SVB's market value fell - fast!šø
To stop the crash, the bank decided to raise cash by selling more of its MBSs portfolio and selling its once coveted shares.
Enter - Silvergate Bank
One of the main investors to buy those shares was Silvergate Bank. An institution well known for its appetite for big bets on crypto.
For background, Silvergate was one of the most important banks in crypto and its biggest client at the time was FTX (remember them?)
FTX crashed suddenly earlier this year, causing customers to pull $8 billion from Silvergate, resulting, sadly, in its unceremonious collapse last week Wednesday (8th March) - coincidently the very same day SVB announced its new lifeline investment from Silvergate.
SVB alarm bells š
1. The news sent start-ups into a panic
2. Resulting in customers scrambling end of last week to save their cash from SVB.
3. The rush to pull cash out sent SVB's market value into a $80 billion tailspin overnight
Takeaway š
Perception is everything, especially in the current financial climate we're in. SVB customers perceived Silvergate's collapse to be related to SVB's press release announcing a fresh cash injection.
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