The Fall of Silicon Valley Bank
Silicon Valley Bank (SVB) collapsed on Friday, March 10, 2023, in what is now the country’s second-largest bank failure, after the 2008 financial crisis.
May 2, 2023
For years, Silicon Valley Bank was a symbol of the dynamism and technological innovation of America. The Bank was first founded in 1983 to support the rapidly growing technology industry in the Silicon Valley area. It saw substantial success at first, supporting over 30,000 businesses by 2003, and even rising to the top 2% of banks nationwide. Located in the heart of start-ups, SVB did not contain its operations in Silicon Valley, as it opened offices across the country. Furthermore, the Bank began to conduct business with countries like Israel, the UK, and China.
Silicon Valley Bank was among the top twenty American commercial banks, with $175 billion in deposits
By the end of 2022, the Silicon Valley Bank was among the top twenty American commercial banks, with $175 billion in deposits. SVB’s success was spurred on by the pandemic, with its bank deposits increasing drastically from 2020 to 2022 due to low-interest rates. However, even as SVB saw increased success, not everything was going smoothly. SVB historically been almost entirely focused on the technology industry, directly subjecting it to the many fluctuations in that particular industry. This became evident when the Bank’s stock price dropped 50% in 2001 after the technology bubble which arose in the 90s (following the introduction in internet-based businesses) burst, leading to the closure of several firms. While the Bank overcame this difficulty, the event foreshadowed what would happen many years later; in 2023, SVB would prove incapable of weathering yet another crisis.
Reasons for Collapse:
The reasons for SVB’s failure are multi-faceted, ranging from governmental regulatory policies to the federal reserve’s monetary policy. A key event leading to the bank’s failure is the roll back of the Dodd-Frank banking regulation in 2018 under the Trump administration. The policy decreased the necessary income threshold required for government banking regulation, allowing smaller to medium-sized banks to be exempt from such regulation. As a result, this enabled banks, like SVB, to make riskier investments without having any reserve capital in the case of failure. By lobbying for this deregulation, SVB inadvertently set the framework for its own demise.
During the 2020 pandemic, SVB decided to invest a substantial amount of money in long-term treasury bonds, previously regarded as a generally safe investment (a “riskless asset”). However, the decision proved to have substantial consequences when the federal reserve raised interest rates to combat inflation. By raising interest rates on the already minimally profitable government bonds, the Fed decreased the value of the bonds, thereby decreasing the value of the Bank’s investments.
Investors, who began to hear about the bank’s new financial troubles, began withdrawing their funds, commencing the terminal bank run on SVB. SVB is primarily connected to the tech industry, with a clear lack of diversity in its assets. As a result, the Bank’s problems were compounded by the increasing economic problems arising in the tech industry, which have caused investors to pull back more capital.
The Bank responded by attempting to raise capital by selling off its assets (at a loss). The decision only frightened investors more, and on March 9, the stock price of the Bank dropped 60%. Finally, on March 10, the Bank was shut down and placed under the control of the FDIC (The Federal Deposit Insurance Corporation).
Government response to collapse:
firmly committed to holding those responsible for this mess fully accountable and to continuing [the] efforts to strengthen oversight and regulation of larger banks so that we are not in this position again
— President Joe Biden
After the collapse of the Silicon Valley Bank, the government, specifically, the Treasury Department, Federal Reserve, and FDIC have announced their promise to ensure that the clients will receive their deposits by the following Monday. While this statement had little reassurance to many Americans, the Fed later created a more concrete plan stated as an “expansive emergency lending program”. With the intent of stabilizing the bank system and economy, this program constructed “lending facilities” where the banks could borrow money from the Fed and pay back their depositors. Furthermore, the Treasury has reserved $25 billion for the installment of the lending system, countering the financial losses. However, many shareholders were out of luck.
During a briefing regarding the economic crisis, President Biden spoke with multiple officials including California Gov. Gavin Newsom and Treasury Secretary Janet L. Yellen. The president stated how he was “firmly committed to holding those responsible for this mess fully accountable and to continuing efforts to strengthen oversight and regulation of larger banks so that we are not in this position again.”
While the banking crisis appears to have deescalated and stabilized, the sudden collapse of the Silicon Valley Bank will not be easily forgotten, and for now, we can only trust in President Biden’s promise of preventing similar disasters from happening in the future.