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Another Tech Bank Goes Belly Up - But Not Because of Crypto

Another Tech Bank Goes Belly Up - But Not Because of Crypto

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Another tech bank is in deep trouble  but not because of crypto

Silicon Valley Bank, or SVB for short, was the go-to lender for tech startups and venture capitalists in Northern California for four decades. Unfortunately, its collapse on Friday represents the biggest banking failure since Washington Mutual's 2008 demise.

SVB experienced financial difficulty due to losses on some of its bonds. As a result, depositors began withdrawing funds from the bank.

SVB’s collapse is a sign of the tech downturn

The financial collapse of Silicon Valley Bank, which was taken over by regulators and placed under FDIC receivership, is yet another indication that the tech industry is facing serious difficulties. This marks the first major tech bank to experience such difficulties since 2008's financial meltdown.

SVB was a premier provider of banking services to California-based technology and health care startups. It provided loans at both early and late stages, as well as investment funds.

Its clients mainly consisted of venture capital firms like Sequoia Capital and Kleiner Perkins, as well as private equity funds like Accel Partners and Ribbit Capital. Typically, these investors opened accounts for their portfolio companies before being able to secure financing from larger banks.

During the tech boom, SVB often offered higher interest rates on deposits than its rivals. Unfortunately, as interest rates have gone up, so has the value of bonds SVB had purchased. This has proven a major issue as they sought to raise capital.

Due to this, customers began withdrawing their money from the bank. As SVB struggled to fill that void, its shares began to decline.

The bank's collapse has created anxiety among customers, many of whom hold money with the bank over its FDIC-insured limit of $250,000. This insurance was put in place to stop bank runs like those which plagued the Depression era but did little to protect SVB from its problems.

It's difficult to predict how this situation will pan out. The FDIC has been trying to sell SVB, or parts of it, to other financial institutions but there is uncertainty whether this effort will succeed.

In the meantime, SVB's customers must find another place to store their cash. Some may be eligible for accessing a government-funded fund, but that will depend on how much money is in their accounts.

But it's also possible that the government may sell some of SVB's assets to a buyer such as JPMorgan Chase or Bank of America. While this option isn't guaranteed, it could be the best way to resolve the crisis.

It’s a lesson for investors

It appears that every time a tech bank fails, it is due to crypto. That isn't to say there isn't illegal activity in the crypto world; but it does suggest if you plan to invest in cryptocurrencies, be aware of what you are getting into.

It's essential to comprehend that many people invest in crypto as a means of storage, even though they could potentially use it for exchange as well. This is because many believe the value of digital assets will rise over time or believe they have more trading potential on crypto exchanges than fiat currencies do. As such, crypto assets may become more valuable than their fiat equivalents due to this potential upside potential.

However, the tech sector is facing difficulties and this has created a cash crunch for many startups. This has alarmed investors and led to bank runs - such as what happened with Silicon Valley Bank (SVB) earlier this week.

On Thursday, the bank's stock price plunged 60% and continued to decline Friday until federal regulators took control. This marks the largest banking failure since Washington Mutual went bankrupt back in 2008.

In addition to a cash crunch, rising interest rates appear to be playing a role. This has made it harder for venture capitalists (VCs) to fund startups and has caused those companies to spend the money stored in their bank accounts.

As such, when Silicon Valley Bank sold their bond portfolio earlier this week, they had no choice but to sell them at a loss due to the tech sector's troubles and the fact they had held these bonds for an extended period of time - necessitating them to be sold at low costs in order to unload them.

This is a lesson for all investors, not just tech ones. The best investors always attempt to understand a company's business model before investing; something Warren Buffet often said in the past.

It’s a warning for banks

Silicon Valley Bank (SVB) was a beloved institution among techies, serving as the go-to bank for many of the nation's biggest and brightest startups. But its demise this week has raised concerns that other tech-oriented banks could soon follow in its footsteps.

For decades, this firm has been a staple of the technology sector, providing financing to nearly half of venture-backed companies in America. Furthermore, it hosts numerous conferences and other events that bring together entrepreneurs, investors and the general public.

SVB's collapse is indicative of more than just a problem with their operations. It serves as an example for other banks to be wary when managing their risk.

After the 2008 financial crisis, banking regulators implemented extensive reforms to make banks more diversified and well-capitalized. While this has helped reduce some of the anxieties that caused the crash, it's not a perfect solution.

As the Federal Reserve has increased its rate hikes, it has driven up borrowing costs for banks. This has compounded losses experienced by some institutions in their securities portfolios.

Banks have been forced to assume more debt than they otherwise would, increasing their overall leverage and necessitating them to purchase new securities for funding those loans. As a result, they've lost billions of dollars over the last year as interest rates have gone up.

It's not the first time a major bank has collapsed due to rising costs of money. In 1998, Lehman Brothers and Enron both went under in similar ways, both managing to avoid what could have been an enormously damaging financial meltdown.

Experts note that SVB didn't have a large and undiversified client base, which is why its collapse is unlikely to cause another chain reaction like the 2008 financial crisis did.

SVB's issues could be indicative of a larger trend: rising bond yields and mounting losses on those securities as the Federal Reserve attempts to control high inflation.

Although it's impossible to say whether this signals the start of an economic downturn, it does raise serious concerns about how well-equipped global banking systems will be to cope with an increase in borrowing costs. Regulators will likely address these concerns during their meeting this weekend with SVB's leadership, who met to try and prevent a run on the Santa Clara-based lender.

It’s a buying opportunity

The failure of Silicon Valley Bank (SVB) is a signal of the tech sector's downturn, but it also has some wider ramifications. As one of the primary lenders to venture capital firms and local tech startups, its failure is the second-largest bank failure in US history.

The bank's collapse should serve as a cautionary tale to investors and banks alike. It underlines the growing likelihood that banks are not adequately prepared for the next financial crisis.

Banks used to be able to protect themselves by diversifying their portfolios and maintaining high capital reserves. But as interest rates have increased, that has become less of a viable option.

Banks that had a large percentage of their assets invested in bonds and other securities have seen their balance sheets deteriorate, leading to losses which are now being reflected in stock prices.

Traditional banks like SVB have historically relied on low-risk assets like deposits to stay afloat. That presents a challenge for them.

SVB wasn't the only tech bank feeling the pinch during this economic downturn: Silvergate Capital, a peer that owned significant stakes in crypto companies and had its own trading platform, shut down on Friday after failing to raise enough capital to stay afloat. Their problems were compounded by an influx of withdrawals from customers, as reported by Wall Street Journal (WSJ).

Peter Thiel's venture capital firm Founders Fund advised its clients to pull their money out of SVB, and other funds followed suit. This resulted in $42 billion being taken out from deposits at SVB - setting off a run that ultimately led to its demise.

Though not ideal, SVB should not cause cause alarm. Had there not been an unexpected run on their deposits, SVB likely could have raised additional capital and it may still be safe to purchase shares in the bank.

Investors should take a broader perspective, however. As the Federal Reserve raises interest rates, it could potentially obstruct investment in higher-risk sectors like tech and crypto.

However, for investors with patience, there remain good opportunities. SVB's collapse serves as a reminder of how quickly technology can evolve and it could indicate that many of the world's biggest banks face an uncertain future. That could also fuel a buying frenzy among those searching for bargains in the market.

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