Thread by @umedpratapsingh

What is Silicon Valley bank collapse? How is it relevant for civil services?

In the 🧵 we will see
a) What happened at SVB?
b) Terms and topics related to it important for #upscprelims
c) PYQs related to it

Do re-tweet for far reach 👇 (1/9)

a) What happened at SVB?

Silicon valley bank accepts deposits and lends money to high-risk startups.

Reasons for collapse 👇 (2/9)

1) Due to the pandemic, startups have experienced slower growth and struggled to raise fundings from venture capitalists. This resulted in startups not paying back to SVB hence leading to increase in loan default. (3/9)

2) FED hiked interest rates that increased their borrowing costs which brought down their profit.
3) 3) Hike in interest rates also made banks' bonds less valuable which prompted them to sell the bonds at loss. (4/9)

4) On wednesday, SVB announced it had sold $21 billion worth of bonds at a $1.8 billion loss.
5) It created panic and customers started withdrawing their deposits amid plummeting share price.

b) Terms and topics related to it important for #upscprelims (5/9)

1) Inflation
2) Rise in interest rate
3) Relationship between bond, equity and rate hike.

1) To curtail inflation central bank raises interest rate which discourages customers to take loan hence decreasing money supply and inflation. (6/9)

2 &3) Bonds, equity, and interest rates are interconnected.

When interest rates rise, bonds become less attractive and equities may also decrease in value due to higher borrowing costs and decreased investment. (7/9)

Conversely, when interest rates fall, bond prices rise, and equities may increase in value due to lower borrowing costs and increased investment. (8/9)

3) PYQs related to this topic

2021 and 2022 (9/9)