I’ll try to explain Silicon Valley Bank’s collapse in under a minute.
So SVB’s target market are high-growth tech startups. Very risky. Low demand for loans.
But have bajillions of cash from Venture Capital. To make money, SVB invested boatloads of deposits in long-term government bonds.
However, as the U.S. recently ballooned its rates after decades of near-zero interest, this resulted in two problems:
- The value of existing bonds plummeted
- Startups can’t rely on VC charity to fund their “non-profit” operations
Startups suddenly needed all of their savings that were essentially stuck in bonds. To accommodate withdrawals, SVB was forced to sell its bonds at a loss; which spooked depositors. V.C. tech bros, coordinating online, decided to withdraw all of their funds in a matter of hours, resulting in the first-ever twitter-led bank run. 🤪
So will SVB’s collapse turn into another Lehman-style Global Financial Crisis?
Well, probably not given SVB’s customer concentration (limited to tech startups), asset quality (relatively strong government bonds vs. Lehman’s mortgage-backed securities), and quick government action (from FDIC and FED).
But no one can say for certain as macro-effects have yet to be seen.
