Thread by @Finology_Quest

Another day, another quest!

The Collapse of Silicon Valley Bank - What is happening? 🧵

How do banks operate?

They take deposits from us 💸, lend most of these deposits out to others & earn high interest rate🤑, They make MONEY 💰, They make more money by investing into other things like BONDS

However, these bonds did not work out for - SVB ⚖️

SVB became greedy, let us explain -

After covid, central bank of US lowered the interest rates to enourage borrowings. But at the same time, VCs invested in a lot of startups too. So, startups didn't take loans but deposited more. Which resulted in a lot of extra cash with SVB.

Instead of keeping this cash safe, SVB invested them into long term bonds which come with higher risks.

What’s the catch here?

SVB had short term liabilities (startup's money) and long term assets (real-estate bonds). A classic mess up. #SVBCollapse

The main problem here are bonds - we think of them as safe option to invest but in reality they are not.

Learn how bonds work here - bit.ly/finology-bonds

Let's continue the story now that you've grasped the concept of bonds.

SVB was unaware that the startup world had been turned upside down.

Interest rates rose, VCs requested their funds, and startups went to SVB to withdraw their funds. #SiliconValleyBank

Soon after, SVB was unable to pay all of the startups, and their plan was made public.

The damage has only just begun; this story has many layers; let us wait and see what happens next.🤔