Silicon Valley Bank Bankruptcy, Why is there no risk of a crisis like 2008? – silicon valley bank crisis is not like 2008 again, here’s why

New Delhi: The world’s leading technology startups and venture capital firms know Silicon Valley Bank (SVB) very well. Following SVB’s bankruptcy, its regulator closed the bank by freezing its assets. It was the biggest collapse of a financial institution since the collapse of Washington Mutual a decade ago. It can be understood from this that how big a failure it is.

Some startups having bank accounts are facing difficulties in paying their employees. They fear that if they cannot access their funds, they may have to shelve their projects. Why did the bank fail, who was most affected, and whether or not the incident could affect the wider banking system in the US? Let’s try to find out the answers to these questions.

The Silicon Valley bank was hit hard over the past year by the Federal Reserve’s aggressive plan to raise interest rates to combat inflation, along with a decline in technology stocks. The bank had bought billions of dollars worth of bonds over the years using customer deposits. This is what banks usually do. These investments are generally safe, but as interest rates rise, the value of these investments has fallen. Because they were getting less interest as compared to today’s higher interest.

Normally this is not a problem, as banks invest for the long term. But things can change when they have to sell in an emergency. SVB’s clients were largely startups and other tech-focused companies, which have been struggling for cash over the past year. Venture capital funding was drying up. Companies were not able to find additional funding for unprofitable businesses. So he had to use his existing funds, which he usually had deposited in a Silicon Valley bank.

So clients from Silicon Valley began withdrawing their deposits. Initially this was not a major problem, but later the bank started receiving requests from customers for withdrawals. So the bank was forced to sell its assets to meet these requests. Selling the bonds at a loss effectively bankrupted the Silicon Valley bank. The bank tried to raise additional capital through outside investors, but was unsuccessful.

Bank regulators had no choice but to seize the assets of Silicon Valley Bank in order to protect the remaining assets and deposits at the bank. Is this a sign that we may face a 2008-like crisis again? For the time being, no, and experts believe that it is unlikely to spread to the wider banking sector.

Silicon Valley Bank was large, but limited exclusively to the technology world and VC-backed companies. Its participation was much in line with that particular part of the economy, which was badly hit in the last one year. Other banks are much more broad based across multiple industries, customer bases and geographies. The Federal Reserve believes that the big banks will survive even in the event of a major recession and widespread unemployment.