The Collapse of Silicon Valley Bank

On the 10^th of March 2023, Silicon Valley Bank (SVB) was shut down by the FDIC. It is not the first time we are hearing of a bank in United States closing its doors, so why is SVB’s collapse so widely reported?

Well, there are a few reasons for the uproar:

• Silicon Valley Bank was the 16^th largest bank in the U.S. before the collapse. The last time a bank of its size went under was amid the financial crisis of 2008.
• The timing of SVB’s collapse could not have come at a worse time – the fear of a recession in the U.S. was at its peak and, understandably, a large bank failing did not help the matter.
• Adding more fuel to the fire, SVB’s collapse was the result of poor risk management practices which led to liquidity problems.

Does it look at least on paper like a re-run of 2008? Yes, pretty much. The Federal Reserve seems to agree taking immediate action, including its Bank Term Funding Program to avoid a snowball effect and restore confidence in the U.S banking system.

So, how does a prominent bank like SVB fails? We need to look just a few years back, between 2019 and 2022 Silicon Valley Bank experienced massive growth, leaving them with a significant amount of assets and deposits. Only a small amount of said deposits were kept in cash, the remainder was used to buy Treasury bonds and other long-term investments.

These types of assets are historically low risk – low return. As the Federal Reserve started increasing the interest rates, treasury bonds acquired before that started to lose value.

Rising interest rates also had a huge effect on SVB’s clients – many of whom are tech companies. With all the layoffs in the tech industry coupled with tough times for businesses in general, cash is scarce and large withdrawals were to be expected.

Considering the strides that were made in improving risk management in banking after 2008 it is still quite a mystery how a bank of this size did not learn the lessons of the last financial crisis and got itself in a liquidity crunch that resulted in the bank’s collapse.