- 14 Mar 2023 16:35
#15268214
@Rancid
Basically, the bank failed to take into account interest rate risk in relation to bonds. It sounds like they failed to diversify to minimize their risks.
Rancid wrote:VB wasn't investing directly in tech startups (AFAIK). If they were, it wasn't in large numbers. That is not what precipitated the downfall. They are not a venture capital firm. What they were doing is just being the bank for start-ups. That is, once a start-up is funded by a venture capital firm. The money given to the startup was deposited into SVB. The start-up would use SVB to pay its employees, buy capital equipment, pay operating expenses, etc. etc.
SVB put a lot of that deposit money into US bonds actually (they were actually trying to be responsible lol). Once interest rates went up, those bonds loss value. The bank decided to issue new shares to raise money to cover the losses. A panic event ensued when this news spread (recall what I said about velocity of money and social media). Then a bank run happened, also shares on the secondary market for the bank were sold off too (thus making it harder to raise the capital through new share issuance.).
The funny shit is, if there was no panic, this bank probably would have raised the capital no problem. There probably wouldn't have been a bank run, and the hit to their share price probably would have been minimal (just the new share dilution). The venture capitals scene is still strong despite economic headwinds and inflation of the last few months. There probably still would have been wind in the sails of SVB. This event shows us that the system is too loose for the technological, social, and economic structures of today. IMO, this is a good thing we are seeing this now. hopefully the right adjustments are made.
Basically, the bank failed to take into account interest rate risk in relation to bonds. It sounds like they failed to diversify to minimize their risks.
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