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Fast-Paced Rising Rates Environment - A Menace to Lenders?! 🏦💹📉


Silicon Valley Bank, a subsidiary of SVB Financial Group, one of the most bounteous lenders in the venture capitalist (VC) -backed start-ups and private equity market, plummeted around 60%🔻on March 9th, 2023 followed by shuttering down of the bank by the regulators on March 10th, 2023. 📉

It marks the largest bank failure since Washington Mutual during the height of the 2008 financial crisis.



• Understand how SVB Worked.


SVB operated as a full-service commercial bank that accepted deposits, and lent majorly to tech companies, providing multiple services to VC and private equity firms that invest in technology, life sciences, and healthcare.


If we turn the pages of history, SVB group relished a bull run in the market in the year 2021, as it lent in the era of low-interest rates.



• What Went South?🔻


🏦 In 2021, SVB saw a whopping 206.35% increase in deposits (the major low-cost source of funds for banks.) from the year 2019.


🏦 The loan book couldn’t match the pace of growth of deposits thus to generate a return on capital banks purchased $80 billion worth of securities- Mortgage-backed securities, US Treasuries, etc.


🏦 In a rising interest rate environment, the deposits declined drastically as rising inflation compelled the depositors to reduce their deposits/savings as well as rising int rates made them invest in risk-free bonds generating higher yields, available at lower prices. (Prices of fixed-income securities tend to fall when interest rate rises.)


🏦 Decline in deposits (funds) and rising interest rates compelled the group to liquidate its $21bn in securities in the portfolio at huge losses, an after-tax loss of $1.8 bn.



• Impact on other lenders?📉


The collapse of SVB did have a ripple effect on the domestic as well as the foreign banking sector. The world's largest banks witnessed a sharp fall in their prices in the last two trading sessions.


Although SVB bank failure isn't completely significant for the entire banking industry, it surely did badly hurt the sentiments.

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