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        SVB - What & Why It Happened?

        JP_mykayaplus wrote a column · 03/13 20:53
        Image: Reuters/Dado Ruvic
        Image: Reuters/Dado Ruvic
        $SVB Financial(SIVB.US)$ has been hit by a bank run.
        We are going to go through step by step what happened, and why it happened, to paint a clearer picture for better understanding.
        1. What is a bank run?
        A bank run occurs when a large number of customers of a bank or other financial institution withdraw their deposits simultaneously over concerns about the bank's solvency.
        Although a bank is technically an asset-holding machine, it splits its assets into cash, bonds, and securities.
        After all, who doesn't want to earn more money on top of other people's money?
        But when a large number of customers line up to withdraw cash, much more than what a bank has, then it will trigger a bank run.
        2. Why didn't SVB have enough cash?
        Several forces collided to take down the banker.
        First, there was the Federal Reserve, which began raising interest rates a year ago to tame inflation. The Fed moved aggressively, and higher borrowing costs sapped the momentum of tech stocks that had benefited SVB.
        Higher interest rates also eroded the value of long-term bonds that SVB and other banks gobbled up during the era of ultra-low, near-zero interest rates. SVB’s $21 billion bond portfolio was yielding an average of 1.79% — the current 10-year Treasury yield is about 3.9%.
        So, to allow withdrawal, SVB had to sell its bond portfolio AT A LOSS.
        3. Why did a bank run happen to SVB and not other banks?
        In two words - Sector concentration.
        SVB was deeply concentrated in the tech industry.
        As of December 31, 2022, 56% of its loan portfolio were loans to venture capital firms and private equity firms, secured by their limited partner commitments and used to make investments in private companies.
        But when VC funding runs dry, so does the bank's liquidity. The tech selloff last year was a foreshadowing. Coupled with mark-to-market losses, the bank eventually imploded.
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        The information available in this article/report/analysis is for sharing and education purposes only. This is neither a recommendation to purchase or sell any of the shares, securities, or other instruments mentioned; nor can it be treated as professional advice to buy, sell or take a position in any shares, securities, or other instruments. If you need specific investment advice, please consult the relevant professional investment advice and/or for study or research only.
        No warranty is made with respect to the accuracy, adequacy, reliability, suitability, applicability, or completeness of the information contained. The author disclaims any reward or responsibility for any gains or losses arising from the direct and indirect use & application of any contents of the article/report/written material
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