Following Silicon Valley Bank Collapse , investors are left wondering what was happening and how it might impact the banking industry in general. SVB is often called “one of woke bank.”

SVB put the funds of its depositors in bonds which are generally considered to be safe. When interest rates began climbing, these bonds lost value. That forced the bank to selling them for a substantial profit.

Higher Interest Rates

The US government has assured its customers their money in SVB is safe. However, this is a stark reminder of how quickly it’s possible for things to go wrong.

Tech start-ups and other businesses which held large amounts of cash SVB started to take it out rapidly as negative rumors spread through the tight-knit venture capitalist community. The amount of withdrawals was more than $250,000 and weren’t insured by the Federal Deposit Insurance Corporation.

Silicon Valley Bank made a sequence of poor investments in bond portfolios that resulted in massive losses when the interest rate climbed. Because of the technology that lets wealthy people withdraw their money with a mouse click SVB needed to liquidate its portfolio of bonds to meet demand. The result was even greater loss and forced SVB into the red. It was the most significant failure of a regional US bank since the 2008 financial crisis.

Uninsured Deposits

Similar to other banks SVB invests its deposits in generally safe investments, such as bonds. But as the Federal Reserve aggressively raised interest rates in order to curb inflation, SVB’s bond portfolio lost value. The bank had to purchase and borrow properties to fund the cash required for withdraws. The classic bank run was initiated when customers started to take cash withdrawals in a frenzy.

Tech startups and companies that have deposits of more than $250,000 are particularly affected because their accounts are only protected by the FDIC until $250,000. SVB has had to close its doors as a result of the swift cash out. The panic didn’t stop at that. Conservative political analysts and pundits jumped into the frenzy, claiming that SVB failed because of its “woke” policy. This sparked a backlash that changed the focus of discussion to ideology rather than risk management. This collapse of a bank serves as an alert to the risk of ideologies when it comes the stability of financial markets.

Tech Start-Ups

It is money that drives startups, even though it is the tech industry that praises its nerdy employees. It’s also the case that Silicon Valley Bank, the 16th-largest US bank that collapsed before it did it was an ideal place for many of those firms to put it. The bank often lent to venture capital-backed start-ups, helping them fill the gap in their finances between obtaining debt or equity financing or their next round of capital.

SVB invested part of the deposit into bonds, which are usually considered to be safe. In the event that interest rates increased the bond’s value fell. Then, they began to scare customers who had deposits. In less than 48 hours those who were scared taken out enough cash to place SVB in liquidation.

Investors are wondering how SVB was able to fall, and whether similar banks could be vulnerable. For those who have deposited money at SVB, the most pressing issue is when will they get their paychecks back. For those who rely on their paychecks to pay their mortgage, rent or tuition for their kids it doesn’t look promising.

Bank Run

A bank that is carrying more cash than assets faces the problem of. The bank is fine if everybody stays put. However, a flurry of customers who withdraw their funds could cause a catastrophic collapse.

That’s what occurred in sbv collapse. It was the 16th largest banking institution in America and also provided services to venture-backed tech companies. It offered loans and deposits sums of up to $42 billion.

The bank’s collapse was caused through its Federal Reserve raising interest rates and pushed the cost of borrowing up and compelled tech startups to take out their deposits. SVB additionally invested its customers in bonds with a long term that eventually lost their value when inflation grew.

Additionally, SVB had less stringent regulation than the midsized and regional US banks. It was also able to create a large bond portfolio which needed to be sold for a loss to service the $42 billion in withdrawals.