Silicon Valley Bank crisis explained in 4 steps

Let’s understand how the events unfolded with Silicon Valley Bank in 4 simple steps.

#1 Start-ups’ fundraising season is at its peak in the US and elsewhere, and most of them are parking their funds in the Silicon Valley Bank. They’re withdrawing it as and when they want it.

#2 SVB invested a substantial amount in government bonds. This was at a time when Fed interest rates were low and the prices of the bonds were high.

#3 The Fed started to increase the interest rates in 2022. This also marks the time when the funding season went to a standstill.

#4 Since no more money was getting raised by startups, they started using their funds parked with SVB. Coupled with this, interest rates rose, making the prices of their government bonds fall. SVB got hit from both ends. Deposits slowed down, Investments value decreased (due to rising rates). The Bank-run made the sale of their bonds at a lower valuation and the entire mismatch blew.

This is the story of SVB! Obviously, as a bank, they should have anticipated this and moved their investments elsewhere.

Anyway, they have been bailed out; but I hope this helped you understand the process.

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Hi @kunal05 ,

Without moving the investment elsewhere, is it possible to hedge the interest rate risk of the current investment?

Hi Amit,

Banks generally hedge interest risk using credit spreads (type of Derivative contracts), which more so acts like insurance for them. Assuming that SVB must have also done it, but not to this extent.

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