At the start of the year, economists and financial analysts were making numerous predictions about how the year would play out, but very few could have guessed that a massive banking failure would occur just three months in. Silicon Valley Bank, a firm that had $209 billion in assets, was forced to shut its doors in March 2023 by the California Department of Financial Protection and Innovation. Many factors led to the demise of the bank, and its ultimate collapse has impacted many. While Silicon Valley Bank is just a name now attached to the largest banking crisis since 2008, financial forecasters are working to understand what the long term effects of this bank failure will be.
In order to understand the implications of the end of Silicon Valley Bank, it is first necessary to note what went wrong that resulted in such a loss. Silicon Valley Bank, based in Santa Clara, California, was a provider of banking services to organizations and individuals of all stages but its speciality was in providing these services to startups and venture-backed firms. Prior to the bank’s downfall, it experienced large-scale growth in assets and deposits from 2019 to 2022. After procuring the large sums, the firm decided to invest in treasury bonds and other long-term investments. The firm saw fit to invest in these bonds because while the returns remained on the lower end of the spectrum, so did the risks associated with purchasing such bonds. However Silicon Valley Bank’s investments grew riskier due to the Federal Reserve’s decision to raise interest rates as a way to reduce inflation. Ultimately the bonds they had purchased declined in value. Additionally, on a different front, many of the bank’s customers hit financial trouble due to their association with the troubled tech industry and decided to withdraw large amounts of funds from their accounts. In order to deal with the massive withdrawals, the organization sold off some of its investments at a loss of $1.8 billion. This marked the beginning of the end for the Silicon Valley Bank.
Following the $1.8 billion loss, the bank decided to put out more stocks to raise funding but the stock of Silicon Valley Bank’s holding company, SVB Financial Group, crashed at the opening of the market. This led to a total of $42 billion of withdrawals from the bank. After this, regulators seized the firm and trading for the bank’s stock was halted. The Federal Deposit Insurance Corporation taking emergency measures, allowed all funds, including uninsured ones, to be recovered. First Citizens Bank bought off the rest of Silicon Valley Bank except its $90 billion worth of securities and assets. The SVB Financial Group filed for bankruptcy following the demise of its bank.
The blame for this incident was placed upon the senior management of the company and its board of directors. The Fed claimed that the top management failed to perform proper risk evaluation and the board of directors failed to keep the senior leaders of the firm in check. Regulators also took on a part of the blame as they should have done a better job of assessing the firm and its potential problems during the rapid growth between 2019 and 2022.
While the collapse of Silicon Valley Bank was almost six months ago, its effects can still be felt today. For example, the Federal Deposit Insurance Corporation insures up to $250,000 but it made an exception in this case. Regulators believed it was necessary to insure the full amount in order to stop the fear and the notion of instability in the banking system. Distrust and uncertainty still linger in regard to the banking system and talks of recession aren’t helping matters either.
