SVB Crisis: Snowballing Down the Valley

California-based Silicon Valley Bank (SVB), which specifically catered to startups, went bankrupt after it reported huge losses on investments. The bank received an influx of deposits in 2021 due to strong private fundraising and easy funding available to startups. SVB parked these deposits in government bonds and long-dated mortgage-backed securities, which are deemed risk-free. However, with the Fed aggressively increasing interest rates to tame inflation, the bank incurred huge mark-to-market losses on these securities, leading to a liquidity crunch at the bank when its clients started withdrawing money. This crisis challenges the risk-free status ascribed to these bonds and the level of regulatory oversight for small banks. On the other hand, large US banks are relatively safer due to their diversified business model, strong risk management practices, and stringent regulatory requirements related to liquidity and capital.