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3 Ways The Silicon Valley Banking Crisis Might Affect The Economy

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How it could:

It might hurt your money.

Under FDIC insurance, most banks can cover up to $250000 per depositor in each ownership account. In other words, if you’re worried about losing your money in your savings, you could be reimbursed. However, for those who have amounts exceeding $250000, you might not be able to regain all your money back.

Outside of savings, there are other ways that the bank collapse could hurt your finances. Firstly, depositors risk losing their deposits and their liquid cash might become unavailable. Those who get their salaries through SVB also risk losing out on a significant payday. It can lead to the second issue.

It might start layoffs.

Companies that relied on SVB, either for backing or for financial profit, might undergo layoffs shortly. As many of these businesses are startups, their liquid cash could end up drying out and forcing them to reconfigure their financial plans. As a result, it’s possible that people could lose their jobs in the future. Keep in mind, however, that this isn’t a guarantee.

It might be a warning sign about the economy.

Lastly, the collapse of SVB could lead to a serious burden for financial institutions in the country and, in effect, the overall economy. Back in 2008, the government had to buy out over $700 billion worth of financial assets from failing firms. This was done to increase market liquidity, in an attempt to protect the economy.

Given that SVB is the 16th largest bank in the country, there’s no telling how badly the financial system will be affected. While the government is working hard to contain the issue, remember that SVB had a strong influence on the rise and growth of the tech industry. The fallout could lead to problems in the future of the tech sector and eventually the economy as a whole.

One of the most shocking news stories to come out this year was the collapse of Silicon Valley Bank (SVB). One of the largest commercial banks in the country, it was recently placed in receivership under the Federal Deposit Insurance Corporation (FDIC). While bank failures have happened in the past, very few have been as large or as significant as the Silicon Valley Bank. Due to the collapse of the bank, questions are circling about the state of the economy and the possibility of a recession. Here’s what you need to know about the SVB, the timeline of its collapse, and the ways it might or might not affect your finances.

What is the Silicon Valley Bank?

Silicon Valley Bank is a subsidiary of the Silicon Valley Bank Financial Group. It started in 1983, opening its first branch in San Jose. While the bank provided business services for companies of all sizes, it gained a reputation for helping out startups and venture-backed companies, especially those in the tech sector. Compared to other banks that were older or more conservative, Silicon Valley Bank prided itself in pushing for innovation.

How did the Silicon Valley Bank (SVB) Crisis happen?

To understand how the SVB crisis occurred, you need to go back to a time when it was doing remarkably well. During the pandemic, Silicon Valley Bank went through a period of significant growth. Within three years, it gained several assets and deposit amounts. These were then used to buy Treasury bonds and other long-term debts since they were low-risk options, albeit with relatively low returns. This could’ve been an attempt to earn more money, especially when interest rates were falling.

However, when the Federal Reserve increased interest rates to fight inflation, Silicon Valley Bank’s bonds faced a serious issue. Firstly, their bonds began to decrease in value since other bonds could be purchased with higher interest rates. Secondly, some of their customers began to withdraw funds to make ends meet, especially while they were faced with inflation.

Lastly, there was the rollback of the Dodd-Frank Act; normally, banks with over $50 billion in assets were subjected to more rules and oversight. However, the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act raised that requirement to $250 billion. Due to the increased requirement, Silicon Valley Bank did not qualify and therefore did not get additional regulation or monitorin

By March 8 of 2023, Silicon Valley Bank reported that it had lost over $1.8 billion on its bond portfolio while announcing plans to sell more stocks to liquidate its assets. When the market opened the next day, the bank’s stock price dropped by 30%. By the end of the day, it had gone down by 60% This caused multiple customers and entrepreneurs to take their money out of the bank. By the day’s end, the total amount of cash withdrawal attempts reached around $42 billion.

As said before, March 10 was the date when US regulators took control of the bank and effectively shut it down. One week later, on March 17, the Silicon Valley Bank Financial Group filed for bankruptcy protection. Due to the shocking and seemingly rapid decline of Silicon Valley Bank, it is now considered the biggest banking failure since the 2008 Global Financial crisis.

silicon valley banking crisis

Will the Silicon Valley Banking Crisis affect me?

Given how serious and surprising the SVB collapse is, many people have wondered if it’ll cause financial problems in the future. At this time of writing, it’s a relatively recent event. Because of that, there’s no definitive answer that can be given. However, there are reasons to believe that it might and might not affect you. Here are three different reasons why the SVB crisis might lead to serious repercussions, as well as three reasons why it might not.

How it could:

It might hurt your money.

Under FDIC insurance, most banks can cover up to $250000 per depositor in each ownership account. In other words, if you’re worried about losing your money in your savings, you could be reimbursed. However, for those who have amounts exceeding $250000, you might not be able to regain all your money back.

Outside of savings, there are other ways that the bank collapse could hurt your finances. Firstly, depositors risk losing their deposits and their liquid cash might become unavailable. Those who get their salaries through SVB also risk losing out on a significant payday. It can lead to the second issue.

It might start layoffs.

Companies that relied on SVB, either for backing or for financial profit, might undergo layoffs shortly. As many of these businesses are startups, their liquid cash could end up drying out and forcing them to reconfigure their financial plans. As a result, it’s possible that people could lose their jobs in the future. Keep in mind, however, that this isn’t a guarantee.

It might be a warning sign about the economy.

Lastly, the collapse of SVB could lead to a serious burden for financial institutions in the country and, in effect, the overall economy. Back in 2008, the government had to buy out over $700 billion worth of financial assets from failing firms. This was done to increase market liquidity, in an attempt to protect the economy.

Given that SVB is the 16th largest bank in the country, there’s no telling how badly the financial system will be affected. While the government is working hard to contain the issue, remember that SVB had a strong influence on the rise and growth of the tech industry. The fallout could lead to problems in the future of the tech sector and eventually the economy as a whole.

How it couldn’t:

It might not have the same fallout as the 2008 Financial Crisis.

While the collapse is significant, let’s not assume that it will lead to another financial crisis. First of all, consider that the SVB collapse does not cover the same reach or implications as the one in 2008. Back then, institutions like Lehman Brothers were involved in multiple sectors and coordinated with other banks. The Silicon Valley Bank, however, focused mostly on the tech sector and didn’t make as many connections.

Furthermore, according to David Skeel, a professor of corporate law, the government has already made strides to contain the issue and protect those involved. For example, the Federal Reserve announced that it would invoke a systemic risk exception. In other words, depositors could be fully refunded even if their cash was uninsured. While other banks could suffer the same issues in the future, it seems that the government is already on top of the situation.

Don’t wait for conditions to be perfect for getting started. Trust that you have everything that you need to get going on the task. You will discover any additional resources that you need once you get started.

It might not cause a sudden rise in inflation.

The Federal Reserve has one goal: to control inflation and keep the economy steady. While the SVB collapse has made that job harder, it’s not necessarily going to lead to disaster. The Fed even promised to protect those whose cash was uninsured. Not only does this help those affected by the collapse, but it also helps consumers in other banks avoid panic withdrawals. In addition, the SVB crisis will be a talking point when the Federal Reserve discusses whether or not to raise interest rates again.

It might not be as painful as it seems, as long as you prepare.

Ultimately, as bad as the SVB collapse is, there is no clear sign that it will cause serious damage to everyone in the country. Again, the fallout is still happening, so there is no guarantee that things will work smoothly. That said, it’s also not a sign that things will fall apart. What you can do instead is to prepare yourself in advance. Things like emergency funds and a diversified portfolio can help you keep your money safe in the event of a financial crisis. That way, even if things turn out badly, you have enough assets and resources to protect yourself. The sooner you prepare, the better your chances will be.

Given that SVB is the 16th largest bank in the country, there’s no telling how badly the financial system will be affected. While the government is working hard to contain the issue, remember that SVB had a strong influence on the rise and growth of the tech industry. The fallout could lead to problems in the future of the tech sector and eventually the economy as a whole.

Takeaways:

  • Silicon Valley Bank (SVB), one of the largest commercial banks in the US, recently collapsed and was placed under FDIC receivership.
  • SVB, established in 1983, was known for supporting startups and venture-backed companies, particularly in the tech sector.
  • The bank’s crisis was triggered by multiple factors
    • Significant growth during the pandemic
    • The purchase of long-term low-risk debts
    • The Federal Reserve’s increase in interest rates
    • Customer fund withdrawals
    • Less regulation due to the rollback of the Dodd-Frank Act.
  • By March 2023, SVB lost over $1.8 billion on its bond portfolio, which led to a huge drop in its stock price and mass customer withdrawals. US regulators took control on March 10, and the SVB Financial Group filed for bankruptcy on March 17.
  • The SVB crisis could impact individuals and the economy in three significant ways: potential loss of savings over the FDIC limit, potential job layoffs, and possible warning signs about the overall state of the economy.
  • However, it might not lead to a financial crisis similar to 2008 as SVB’s reach and implications are different, and the government is taking active steps to contain the issue.
Article Sources
  1. Gobler, E. (2023, March 20). What Happened to Silicon Valley Bank? Investopedia.
  2. Kokalitcheva, K. (2023, March 18). Timeline: Silicon Valley Bank’s saga. Axios. 
  3. Malcolm Wong Jun Xiang & Sherilynn Ngerng Siew Fong. (2023, March 14). Silicon Valley Bank’s Collapse: Its Potential Domino Effects. The Edge Markets.
  4. Miettinen, D. (2023, March 17). The banking crisis: What you need to know. Marketplace.
  5. Saumya. (2023, March 14). SVB Crisis: What are its Implications on the Economy and Markets? Jagranjosh.com. Retrieved from: https://www.jagranjosh.com/general-knowledge/svb-crisis-implications-on-economy-and-markets-1678699322-1
  6. Virginia REALTORS®. (2023, March 17). Collapse of Silicon Valley Bank and Signature Bank: What Happened and How It Impacts Your Business – Virginia REALTORS®. Retrieved from: https://virginiarealtors.org/2023/03/17/collapse-of-silicon-valley-bank-and-signature-bank-what-happened-and-how-it-impacts-your-business/

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