Two main banks of America have collapsed! California’s Silicon Valley Bank and New York’s Signature Bank. This is said to be the 2nd biggest bank crash in American History! The 2008 collapse of the Washington Mutual Bank was the biggest. It was followed by the 2008 financial crisis. Will there be a recession again like 2008? How did it all happened? Let’s read and find it out!
Silicon Valley Bank Crash
The Silicon Valley Bank was established in 1983. Initially this bank invested a large chunk of its money into real estate. Almost 50% of the money was invested in real estate. But in 1992, California’s real estate market crashed terribly! Due to this, the bank had to incur a loss of $2.2 Million. Due to this huge loss they diversified their investments and invested only 10% in real estate. Recently, again this bank has to suffer the same problem but on a larger scale!
From 2000’s bank invested a lot of money in technology startup’s. Almost 65% of the tech startup’s were served by this bank! But the problem began with the Covid-19 pandemic. Many people were depositing their money in this bank and the amount of money got almost doubled as compared to the last year. So, this bank invested billions of dollars in government bonds and corporate bonds. At this time the interest rates were too low but suddenly the interest rates increased!
As Bonds and Interest rates are inversely connected. Whenever interest rate increases the bonds price decreases. By this SVB bank had to suffer from losses. And when interest rate increases all people prefer not take loans so they always withdraw from their account.
As they have invested a lot of money in bonds and they didn’t have cash to give to their customers they were selling bonds in losses! Due to this bank suffered from billions of dollars! And as many people were withdrawing money. Due to all these reasons The Silicon Valley Bank Crashed!
Recession in 2023?
Its impact on the American and Global Economy is yet to be seen. Though people are comparing it to the 2008 financial crisis, but there is a difference. The 2008 crisis was due to the crash of American housing market. And this case is quite different. Experts believe that in the current situation matters will not get as bad as 2008!
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