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Silicon Valley Bank Assignment

The Silicon Valley Bank defaulted due to heavy investments in long-term government bonds that declined in value when interest rates rose sharply. This caused the bank to have low cash flows and forced them to sell bonds at a loss. When the bank then failed to raise capital from an IPO, customers lost confidence and started a bank run by withdrawing their deposits en masse. This liquidity crisis caused the bank to default. The management failed to properly assess and manage the risks in their investment portfolio. The bank run concept demonstrates how a loss of confidence can spread from one financial institution to others, as shares of other major U.S. banks also dropped in response.

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113 views2 pages

Silicon Valley Bank Assignment

The Silicon Valley Bank defaulted due to heavy investments in long-term government bonds that declined in value when interest rates rose sharply. This caused the bank to have low cash flows and forced them to sell bonds at a loss. When the bank then failed to raise capital from an IPO, customers lost confidence and started a bank run by withdrawing their deposits en masse. This liquidity crisis caused the bank to default. The management failed to properly assess and manage the risks in their investment portfolio. The bank run concept demonstrates how a loss of confidence can spread from one financial institution to others, as shares of other major U.S. banks also dropped in response.

Uploaded by

Maaz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1. What are the basic reasons for the “Silicon Valley Bank” default?

and how this default


is different from the default of conventional banks in the recession of 2007-2008.
Ans: To understand the reasons, we have to understand the dimensions of the operations and
portfolio of the bank. Their 10% to 15% money comes from equity and almost 85% to 90%
comes from deposits. With this money, they have to invest in any portfolio to generate a safe and
profitable income in return. They invested heavily in the long-term government bonds and rest in
MBS. In 2021, the interest rate was 0.25% but in 2022-23 it elevated up to 4.75%. Which
eventually raised the cost of living and inflation. Now, they price of bonds were lower than the
actual price at which they were bought. They were low on cashflows and then they decided to
sell the bonds on less price. They eventually asked a stakeholder to invest in the IPO but was
rejected. This news was like a bush-fire. Everyone started to withdraw their money from the
bank and lack of cashflow cause the bank to go default.

2. What went wrong with the management decision? Can you link the decision-making
with the CAMELS component?
 Ans: The management part of the CAMELS approach went wrong in this point. Their
management weren’t good enough to analyze the risk in the market and how to tackle it when it
arrived.

3. What is the “Bank Run” concept and does the concept affect the other operational
banks in the US?
Ans: A bank run is when a large number of customers of a bank or other financial institution
withdraw their deposits at the same time over fears about the bank's solvency. Confidence of the
investor is the key factor in making or breaking the financial market and the current situation
shows that local public have lost their confidence. This is the cause of the many financial
institutions default. As of now, in a sign concern are spilling into other parts of the banking
sector, shares of other lenders have been falling, too. JPMorgan Chase, Bank of America, Wells
Fargo and Citigroup all suffered drops of between 4% and 7% in their shares. An exchange-
traded fund tracking regional banks, the SPDR S&P Regional Banking ETF, was down more
than 6%. Banks in Europe were also hit.

 
4. What are the learning lessons for smaller companies, while using the bank account as a
“Checking Account”?
Ans: Specifically, by looking at the details of "Bank deposits in the Notes to Account," smaller
companies can gain insights into how to manage their cash balances and avoid defaulting on
their checking accounts.
One lesson that smaller companies can learn from the listed company's financial statements is the
importance of maintaining adequate cash reserves. By keeping a sufficient amount of cash on
hand, smaller companies can ensure that they have enough funds to cover their expenses and
avoid overdrafts or bounced checks. This can help mitigate the risk of defaulting on their
checking account.
Another lesson that smaller companies can learn from the listed company's financial statements
is the importance of monitoring their bank account balances regularly. By keeping a close eye on
their account balances and reconciling their bank statements on a regular basis, smaller
companies can detect any errors or discrepancies before they escalate into bigger problems. This
can help prevent overdrafts or other issues that could lead to defaulting on their checking
account.
In addition, smaller companies can also learn from the listed company's financial statements
about the importance of diversifying their cash holdings. By spreading their funds across
multiple bank accounts or investment vehicles, smaller companies can reduce their risk exposure
and ensure that they have access to funds even if one account or investment performs poorly.

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