Why did Silicon Valley Bank fall and what does it mean for Czechia?

When it became clear that SVB was going bust, a number of financiers reminisced about the 2008 collapse of Lehman Brothers bank -- the biggest U.S. banking crash in history. It is this event that is considered to be the trigger for the subsequent financial crisis.

Silicon Valley Bank Crash Is Considered The second largest banking crisis in the history of the United States. But it seems that this time (hopefully and so far) it might not be as hot as it was in 2008. Still, the Silicon Valley Bank crash is a significant complication for the American and thus the world economy.

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SVBs have become fateful government bonds

‍Government Bonds are securities that are issued by the government of a given state to use them to raise money from investors for the state budget. These bonds have a fixed interest rate and a predetermined maturity date - after maturity the investor gets the full amount invested back. Because government bonds are issued by governments (states), they are mostly considered a low-risk asset.

Silicon Valley Bank ranks among mid-sized banks -- big enough that their downfall could shake the market. SVB's troubles not only shook the market, but raised concerns about the stability of the global financial system.

SVB's assets at the time of the crash amounted to $209 billion, that is, roughly 4.6 trillion crowns. In 2018, it was $50 billion. You ask how could a bank with such large assets go bankrupt?
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Silicon Valley Bank (SVB) was before its crash 16th largest bank in the United States. It belonged to SVB Financial Group and specialized in providing banking services for startups, typically technology firms. After the collapse of SVB, which occurred on March 10, 2023, the Federal Deposit Insurance Corporation took control of the bank.

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A combination of two factors was behind the fall of SVB:

1. SVB in recent years invested a large part of its capital in long-term government bondswhich she eventually had to sell at a loss.
2. Bank yourself specialized in startups. Its clients included growth greats such as BlockFi, Roblox, Circle and other technology companies.
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In the post-Covid-19 pandemic, everything went smoothly. Interest rates in the US were low and the business of technology firms was performing well, so these companies held a lot of spare cash. They deposited it in their accounts at Silicon Valley Bank, among others.

In order to get the best value out of this money, SVB decided to invest it and buy a large number of 10-year government bonds, which generally tend to have a higher yield than short-term bonds. But it was this decision that made the bank fateful.
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The US Federal Reserve (Fed) will have to do so in 2022 due to high inflation to start lifting interest rates in the US, causing the value of 10-year bonds that SVB had previously bought to fall noticeably.

That normally wouldn't matter -- the bank could wait for bond yields to rise again. However, the increase in interest rates in the US has a noticeable impact on technology firms (i.e. SVB clients), which have begun to withdraw money from their accounts in large quantities. So much money that Silicon Valley Bank didn't have it available.

Thus, the bank management had to resolve the situation by selling loss-making government bonds, to increase the amount of cash. And when even that was not enough, they decided to sell their own shares, which, however, did not find a buyer.

These moves by the SVB caused a panic that led to the classic rune on the bank. Clients lost trust and within a day tried to withdraw so much money that it drove Silicon Valley Bank to bankruptcy.
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A run on the bank refers to a situation where clients lose confidence in the bank and start withdrawing deposits en masse in fear of their finances. If a bank does not have enough cash, it can quickly go bankrupt.

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To better understand the context briefly and clearly:

1. From 2018 to 2022 SVB cash grew from $50 billion to $209 billion. The bank bought long-term government bonds for it, among other things.
2. The US central bank began raising interest rates up to the current 4.75% in 2022.
3. Bonds bought by SVBs have lost value due to higher US interest rates.
4. SVB's clients have been withdrawing large amounts of cash from their accounts in recent months.
5. SVB needed to raise capital, so it sold bonds at a loss. In the end, it also offered its own shares for sale.
6. Clients responded by withdrawing cash en masse (a run on the bank), which resulted in SVB going bankrupt on March 10.
7. SVB Bank was taken under the management of the Federal Deposit Insurance Corporation (FDIC).

The impact on banks, companies and ordinary people? American Institutions Prevented Calamity

After the collapse of Silicon Valley Bank (and later another Signature Bank as well), the 2008 scenario threatened to repeat itself. The US government and the central bank, the Fed therefore immediately pulled the rescue brake. These key institutions assured markets that SVB clients would get their money back, even those who did not have insured deposits above $250,000.
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That's a big relief, especially for tech companies that had billions of dollars stored in SVB accounts -- if they didn't get their money back, they could soon be in existential trouble.

In addition, the Central Bank came up with assistance in the form of a program Bank Term Funding Programfrom which commercial banks can draw credit in case of financial problems. The public was also reassured by US President Joe Biden.

Some of the biggest US banks are unlikely to find themselves in a similar situation to SVB, according to Wall Street analysts.

Although stocks in both US and European banks plunged after the collapse of the SVB, there is no danger of a repeat of 2008, at least for now, thanks to the rapid intervention of institutions.

Some of the biggest US banks are unlikely to find themselves in a similar situation to SVB, according to Wall Street analysts. After all, these big banks are subject to more regulation and do not own as many risky assets. Moreover, they are in good financial shape.

In any case, the SVB crash is already having an impact on both banking institutions and public confidence in banks. Americans and American firms will consider more carefully in the coming weeks and months how much money they will leave in their accounts, and some of the population will move their finances to the big banking houses.

Banks in the US will remain under the scrutiny of the authorities and they may have to meet even stricter conditions in the future.
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Czech banks are not at risk of similar risk

Worrying as the situation around the banking sector in the United States is, Czech banks and their clients they don't have to panic.

The fall of SVB and the aforementioned Signature Bank, but even the problems of the Swiss bank Credit Suisse will not have a direct effect on them.

It is true that the shares of Czech banks also fell after the bad news from the USA. However, as economists and analysts confirm, there is currently no reason to fear a bank failure in the Czech Republic. In the same way, other financial institutions with us remain calm.

Czech banks are different from SVB conservative — invest only a small part of the free cash in bonds or other securities. And most of the money they lend to their vetted clients.
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Simply put: Banks in the Czech Republic do not take the same type of risk as SVB, which relied too much on yields from government bonds and thus failed in what every investor should be in control of — risk management.

In addition, Czech commercial banks are in a similarly good financial condition as large banking institutions in the US. Among other things, because they have been partly profiting from rising interest rates in recent months.

Unlike the SVB, Czech banks are conservative — they invest only a small part of their free cash in bonds or other securities.

Thus, in the current situation, an ordinary Czech citizen certainly does not need to run to the bank in fear of not having access to money the next morning.

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What are the lessons to be learned from the fall of SVB?

Banks and other financial institutions must now evaluate the situation in detail, but ordinary people and investors can also take valuable experience from it.

Silicon Valley bank crash shows once again how important it is Diversify your investment portfolio and Don't just rely on risky assets, Or on a single asset. At the moment, when central banks around the world are raising interest rates, that is doubly true.

Risky investments, such as tech stocks or cryptocurrencies, are sensitive to rising interest rates. The portfolio can be balanced with safer assets, such as real estate or gold.

What about US government bonds? These are a safe investment in good times (SVB relied on this). But when interest rates rise, they can cause trouble in some cases and carry significant risk.