Question

SVB, a financial institution that had become the go-to bank for nearly half of all venture-backed tech startups, failed after a run on its deposits triggered by a series of central bank-endorsed interest rate hikes amid a global inflation surge.

Based on the collapse of SVB, answer the questions that follow:

(i) Why did SVB collapse? Explain the primary causes.

(ii) What does the SVB collapse mean for the financial system in Canada? How does it impact it?

(iii) Due to the collapse of SVB, cryptocurrency has been rising significantly, explain the reasoning behind this.

(iv) What is the learning lesson to other banks based on the collapse of SVB?

Answer 1

The collapse of SVB was caused by a run on its deposits triggered by central bank-endorsed interest rate hikes. This collapse can impact the financial system in Canada by leading to a loss of confidence and potential banking crisis. The rise of cryptocurrency after SVB's collapse can be attributed to a loss of confidence in traditional banking systems. The collapse of SVB serves as a learning lesson for other banks to manage risks effectively and have proper safeguards in place.

Step-by-step explanation:

The collapse of SVB, a financial institution, can be attributed to a run on its deposits triggered by a series of central bank-endorsed interest rate hikes during a global inflation surge. The primary causes of SVB's collapse were the increased interest rates, which led to a panic among depositors and a large-scale withdrawal of their funds. As a result, SVB was unable to meet the demands for withdrawals and ultimately failed.

The collapse of SVB has implications for the financial system in Canada. It can lead to a loss of confidence in the banking sector, causing depositors to withdraw their funds from other banks as well. This can create a domino effect, leading to a wider banking crisis. Additionally, it highlights the need for effective banking regulations and monitoring to prevent such collapses in the future.

The rise of cryptocurrency following the collapse of SVB can be attributed to the loss of confidence in traditional banking systems. Cryptocurrency provides an alternative form of storing and transferring wealth that is not reliant on traditional banks. The collapse of SVB served as a wake-up call for some individuals, leading them to seek alternative ways of protecting and growing their wealth.

The collapse of SVB serves as a learning lesson for other banks. It underscores the importance of maintaining strong financial stability by managing risks effectively and having proper safeguards in place. Banks should prioritize prudent lending practices, diversify their investments, and ensure adequate liquidity to withstand potential shocks to the financial system.