How did Silicon Valley Bank fail?

How did Silicon Valley Bank fail? @moneymonitors

Silicon Valley Bank collapsed on Friday, marking the second biggest bank collapse in U.S. history. This has sent shock waves across the entire business world, with potential impact on Indian startups that have deposits at the bank. The bank had invested in around 21 Indian startups, and its stock lost 80 percent of its value this week. Silicon Valley Bank was the largest bank in Silicon Valley based on local deposits and was also the 16th largest in the United States. It was a leading banker to some of the most successful startups in the US and even catered to companies like Airbnb, Fitbit, and Pinterest.Typically, when inflation spikes, the central bank of the country increases interest rates. For example, when the Federal Reserve raises interest from 6.15 to 6.25 percent, even Bank of America will have to increase home loan interest from 8.35 percent to make a profit. When the interest rate goes from 7 percent in April 2022 to 9.25 percent in January 2023, the EMI (equated monthly installment) would go up from $2,336 to $2,720 to repay the exact same loan within the original tenure, marking an EMI increase of 16.7 percent. It is worth noting that the interest rate in the US was just 0.08 percent between 2020 and 2022.

After 2020, the federal interest rates have increased by 4.33%, a 425 basis points increase in just one year. This means that banks could borrow money from the Federal Reserve at just 0.08% and still make a profit of 2.92% by lending at a 3% interest rate.In 2021, Silicon Valley Bank invested billions of dollars in long-term mortgage securities with maturities of over 10 years. This created an asset liability mismatch, with $91 billion being parked in held-to-maturity investments and only $26.1 billion available for sale investments.If you invest in held-to-maturity investments, your money will not be liquid until the maturity period, and breaking your FD could result in a hefty exit fee.Think Bank's bankers devised a clever strategy to avoid this problem - instead of using their own money to give out loans, they issued a mortgage-backed security in the market. This security promised a 3% interest rate with a ten-year maturity period.Bank of America and Citibank each invested $250 million to purchase one unit of the mortgage-backed security, amounting to a collective investment of $1 billion in Think Bank. After ten years, Think Bank will return $250 million to both Bill Gates and Elon Musk.

Elon Musk purchased one unit of a bond for $250 million with the promise of a 3% yield, earning him $7.5 million. However, these mortgage-backed securities are no longer being purchased, causing Silicon Valley Bank's bond portfolio to drop in value. The bank held $91 billion of the portfolio in "held to maturity" securities, and the value dropped by $15 billion with a yield decrease of 1.6%. This has caused a winter in the startup sector with a decrease in funding. Silicon Valley Bank sold a $21 billion bond portfolio of "available for sale" securities with an average yield of 1.79%, still below the current 10-year treasury yield of 3.9%. This crisis could cause more banks to come under scrutiny, potentially leading to more problems in the future. How will this affect India? If the bank returns the money to its depositors, the chaos will be lessened. However, if they do not give back the money, it will lead to more crunch in the startup industry.