London, UK (CNN) — After the collapse of Silicon Valley Bank (SVB) at breakneck speed Friday, investors are now worried about whether its demise could lead to a broader banking collapse.
The US federal government stepped in to guarantee customer deposits, but the downfall of Silicon Valley still reverberates through global financial markets. The government also shut down Signature Bank, a regional bank that was on the verge of collapse, and guaranteed its deposits.
Founded in 1983, Silicon Valley Bank was, just before the crash, the 16th largest commercial bank in America. It has provided banking services to about half of all technology and life sciences companies supported by US ventures. It also has operations in Canada, China, Denmark, Germany, Ireland, Israel, Sweden and the United Kingdom.
The collapse of Silicon Valley Bank came suddenly, after a frantic 48 hours during which customers withdrew deposits from the lender in a classic bank run.
But the roots of its demise go back several years. Like many other banks, SVB invested billions in US government bonds during the era of near-zero interest rates.
What seemed like a safe bet soon faded, as the Federal Reserve aggressively raised interest rates to tame inflation.
When interest rates rise, bond prices fall, and so the jump in interest rates eroded the value of the bank’s bond portfolio.
At the same time, the Fed’s higher interest rates drove up borrowing costs, which meant that tech startups had to direct more money toward debt repayments. At the same time, they were struggling to raise new venture capital funding. This forced companies to withdraw deposits held by Silicon Valley Bank to finance its operations and growth.
Here is an illustrative look at the chart above on the change in interest rates and bank failures.
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