The broker points to the “nail in the coffin” of the SVB. This used to be his biggest asset.

The recent collapse of Silicon Valley Bank has become an extremely high-profile topic, and the mere mention of the acronym SVB could unsettle a market thousands of miles from the US.

Although the situation in the US seems to be stabilizing somewhat, since Monday the problems of the Americans have been suffering, including from the Polish market or the Swiss bank Credit Suisse. The SVB case also affected cryptocurrencies. There is a possibility of another customer panic, fatal for any financial institution.

However, it is worth sticking to the facts, not conjectures and emotions. Therefore, we asked the expert to explain as simply as possible the reasons for the collapse of the SVB, assess the situation on the market and a possible repetition of the 2008 banking crisis. Eric Schmid, Emerging Technology Analyst at XTB Brokerage, answers our questions.

What was a Silicon Valley bank anyway? What were the characteristics of this institution and why was it so important to tech startups and the cryptocurrency market?

Eric Shmyd, XTB: The Silicon Valley Bank was founded in the 1980s and has since become one of the most important business banks in California’s Silicon Valley.

The institution specialized in serving medium and small companies and start-ups, mainly from the technology industry. A particularly good time for the bank came in 2020, when the whole world flooded the financial markets with cheap money.

As a result, venture capital and private equity funds, as well as the aforementioned medium-sized companies, have become very popular with SVB services. The money was invested there because the bank offered good debt service terms and more attractive interest rates for companies.

At the same time, the bank also took on the so-called asymmetric risk. He limited his group of clients to one type – the aforementioned technology companies, sole proprietors and start-ups from Silicon Valley, i.e., as it turned out over time – the largest beneficiaries of money printing. As a general rule, banking institutions must maintain a diversified portfolio of clients.

Technology companies have been hit hard by the Fed’s interest rate hike. Since the health and financial health of a particular bank is directly related to the financial health of that institution’s customers, SVB was in a difficult position for some time before its collapse.

So how did the bank fail? Can you point to one reason? Wednesday information about huge investment losses? Previous interest rate decisions?

There is never just one reason why a financial institution fails. I would point to the rapid policy change by the Fed, which, after years of money printing and stimulus programs, has started a rapid increase in US interest rates as one of the most notable.

The rapid growth of the money supply in the market and the low interest rates that took place during the pandemic have also increased the level of risk in the market. Venture capital funds and start-ups were burning through the cheap money available to them without making too much profit and running into more debt. It was still bearable when interest rates were 0 or 1 percent.

However, by raising interest rates, the Fed increased debt servicing costs. This quickly became a big problem because startups and venture capital funds used cheap debt to leverage established businesses. Many of these enterprises would not have been created in conservative market conditions.

These entities have not adapted to the new market conditions. Therefore, they were forced to withdraw their funds from the SVB bank, i.e. to cover external liabilities.

And then a high-profile raid on the bank and mass withdrawals began?