Silicon Valley Assignment Group 4
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Silicon Valley Bank
International Banking and Finance
INT702 (Sec-004)
Prof. Andrea Thompson-Facey
July 29
th
, 2023
Submitted By:
Fani Rami- 301243313
Gurupriya Krishnakumar Nair- 301212373
Nitika Sharma- 301301215
Riya Roy- 301231800
1.
How did the secondary market fail SVB?
ANSWER:
The secondary market, which allows investors to trade bonds with one another, was an
extremely important factor in enabling SVB to sell its long-term bonds at prices that were seen
to be fair. However, the failure of SVB cannot be completely linked to the secondary market
because it is essentially a venue for investors to trade pre-existing financial instruments. The
secondary market is not an independent factor.
The primary factor that contributed to the downfall of SVB was the substantial and precarious
wager the company made on the persistence of historically low-interest rates. The bank
engaged in market speculation by utilizing the funds deposited by its customers to acquire
bonds with a substantial value amounting to billions of dollars. Nevertheless, the depreciation
in the value of these assets has ensued due to the escalated interest rates, thereby diminishing
their attractiveness when contrasted with bonds that have been issued within the current
framework of elevated interest rates. The customer base of SVB consisting predominantly of
startups and businesses with a technology focus, is observed to be withdrawing their savings
from the bank.
Consequently. Silicon valley bank encountered difficulties in achieving success within the
secondary market, primarily due to its speculative investment decision and the subsequent
decline in the value of its holdings regarding United States Treasury bonds. The financial
institution known as SVB faced significant challenges related to liquidity and bond pricing,
resulting in a notable decline in its deposit holdings and an elevated risk of insolvency.
Consequently. Silicon valley bank encountered difficulties in achieving success within the
secondary market, primarily due to its speculative investment decision and the subsequent
decline in the value of its holdings regarding United States Treasury bonds. The financial
institution known as SVB faced significant challenges related to liquidity and bond pricing,
resulting in a notable decline in its deposit holdings and an elevated risk of insolvency.
2.
Could SVB utilize the primary market to save the bank? If yes, why? If no, why
not?
ANSWER:
SVB could be able to save the bank by using the primary market, but this would rely on a few
variables. New securities, such as stocks and bonds, are first issued and sold to investors
directly on the main market. The following factors should be considered:
SVB could consider
issuing more equity shares
as a means of raising funds. By selling shares
to new investors, the bank would generate additional capital for its operations. This influx of
funds could enhance the bank's financial standing and help offset potential losses incurred
from
its
ill-fated
investments
in
long-term
bond
(Marks,2023).
In addition to offering shares, SVB may decide
to issue additional bonds
in the primary
market to raise money. However, if proper risk management mechanisms are not in place,
persuading investors to buy the bank's bonds may prove difficult. This challenge results from
the bank's previous issues, which were brought on by its reliance on long-term debts (Demos,
2023)
SVB could look at
collaborating with other financial institutions
or IT firms that are
prepared to invest in the bank. Such partnerships would not only bring in more funding but
also beneficial knowledge and synergies that may aid in the bank's future revival.
The SVB's fatal situation made it difficult to attract new investors or issue securities on
favourable terms due to the panic among depositors and the bank's demise, despite the
potential advantages of using the primary market. Even if SVB had been successful in raising
some money, it would not have been enough to deal with the pressing trust and liquidity
issues. To avoid a domino effect that would hurt other banks and the economy, the government
and American authorities adopted a cautious strategy and insured all deposits. Given the bank's
exposure to IT businesses and the potential for job losses and bankruptcies in the industry, the
focus was on re-establishing stability and trust in the financial system.
3.
How did social media and technology influence the failure of SVB?
ANSWER:
The failure of Silicon Valley Bank (SVB) did have an impact on social media and digital
banking technology that played a key role in the events that led to its collapse.
One of the main reasons for the rapid decline of SVB was banking activities fueled by social
media and digital banking technology. These platforms facilitated the rapid dissemination of
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information and enabled customers to access their accounts with unprecedented ease. As
rumors and information spread across social media channels, panic and fear gripped savers,
causing a huge outflow from the bank. The dramatic reach of social media platforms fueled the
size and speed of the bank’s move.
The power of social media to accelerate communication played a key role in the bank’s move.
Real-time updates and instant distribution capabilities enabled individuals to inform and alert
others, creating greater fear and suspicion. Influencers who had a large following and were
able to persuade people had a greater impact on savers’ decisions, increasing savings.
The failure of the SVB highlights the dangers of the financial sector’s increasing reliance on
social media and technology. As more banks embrace digital strategies, they can face the same
risks. The scale of social media can quickly amplify any potential negative news or sentiment,
leaving banks more vulnerable to sudden changes.
In conclusion, the failure of the Silicon Valley bank can be attributed in part to the enormous
impact of social media and digital banking technology. The rapid dissemination of
information, easy access to the internet and influential influence played an important role in
the acceleration of banking activity. This cautionary tale serves as a stark reminder to financial
institutions of the importance of managing the risks associated with social media and digital
platforms while reinforcing the need for thorough crisis management density in modern banks
is strong.
4.
How did asymmetric information contribute to the collapse of SVB?
ANSWER:
Asymmetric information played a crucial and detrimental role in the eventual collapse of
Silicon Valley Bank (SVB). This term describes an imbalance in information distribution
between parties engaged in a financial transaction or arrangement, resulting in one party
gaining a decision-making advantage over the other.
In the case of SVB, the majority of its depositors were Bay Area tech startups that held
accounts with balances that go beyond the $250,000 limit covered by the federal government's
insurance. These startups placed their trust in SVB to safeguard their funds but were not fully
aware of the bank's risky investment strategies. Specifically, they had little insight into SVB's
significant exposure to long-term bonds and unhedged bets on interest rates.
(Hetler, 2023)
On the contrary, SVB's management and decision-makers possessed a deeper understanding of
the bank's investment practices and associated risks. They were well aware of the substantial
exposure to long-term bonds and the vulnerability the bank faced if interest rates moved
unfavorably.
This information asymmetry between SVB's management and its depositors created a situation
where the start-ups, lacking awareness of the bank's risky bets, continued to entrust their funds
to SVB. Consequently, when the true extent of SVB's financial troubles came to light, panic
ensued among the depositors, who were caught off guard. Had they been privy to the bank's
actual financial health, they might have taken pre-emptive measures to safeguard their funds
before it was too late.
The lack of transparency and complete information regarding SVB's financial health and
investment strategy significantly contributed to the rational panic among depositors and
ultimately led to the rapid collapse of the bank. In this sense, the failure of SVB can be largely
attributed to asymmetric information, where the bank held more knowledge about its risky
bets than its depositors, putting the latter at a severe disadvantage. (Fang et al., 2023)
This unfortunate event underscores the importance of transparency and open communication
between financial institutions and their customers. Had SVB been more forthcoming about its
investment practices and potential risks, depositors might have been better equipped to make
informed decisions about the safety of their funds. The collapse of SVB serves as a poignant
reminder that mitigating information asymmetry is vital to fostering a stable and resilient
financial system that can withstand unforeseen challenges.
References
1.
CBC/Radio Canada. (2023, March 12).
What caused the Silicon Valley bank failure, and
what might happen next | CBC News
. CBCnews.
https://www.cbc.ca/news/business/silicon-valley-bank-failure-explainer-1.6776182
2.
Demos, T (2023).
What Happened With Silicon Valley Bank.?.
The Wall street Journal.
https://www.wsj.com/articles/silicon-valley-bank-svb-financial-what-is-happening-
299e9b65
3.
Fang, L., Snellman, K., Munroe, D. G., & Zeisberger, C. (2023, March 30).
Risks and
regulations: The Silicon Valley Bank collapse
. INSEAD Knowledge.
https://knowledge.insead.edu/economics-finance/risks-and-regulations-silicon-valley-
bank-collapse
4.
Hetler, A. (2023, March 27). Silicon Valley Bank collapse explained: What you need to
know
. WhatIs.com.
https://www.techtarget.com/whatis/feature/Silicon-Valley-Bank-
collapse-explained-What-you-need-to-know
5.
Macheel, T. (2023, April 24). Social media raises bank run risk, fueled Silicon Valley
Bank’s collapse, paper says. CNBC.
https://www.cnbc.com/2023/04/24/social-media-
raises-bank-run-risk-fueled-svbs-collapse-paper-says.html
6.
Marks, H (2023).
Lessons from Silicon Valley Bank.
OakTree
https://www.oaktreecapital.com/insights/memo/lessons-from-silicon-valley-bank
7.
Mello Jr, J. (2023, May 2). Social media fueled the run on Silicon Valley Bank: Study.
TechNewsWorld.
https://www.technewsworld.com/story/social-media-fueled-the-run-on-
silicon-valley-bank-study-178230.html
8.
Murray, C. (2023, March 14).
What to know about silicon valley bank’s collapse-the
biggest bank failure since 2008
. Forbes.
https://www.forbes.com/sites/conormurray/2023/03/13/what-to-know-about-silicon-
valley-banks-collapse-the-biggest-bank-failure-since-2008/?sh=5b13b1b54c27
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Related Questions
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Institution B
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