Silicon Valley Bank Failure: What We Can Learn
The collapse of Silicon Valley Bank was one of the biggest banking failures in recent U.S. history. Founded in 1983, the bank specialized in meeting the credit needs of technology startup companies and venture capital firms, and it held more than $200 billion in assets as of December 31, 2022. On Monday, in an effort to stabilize the financial sector, the largest financial institutions in the nation injected $30 billion into First Republic Bank, one of the regional lenders facing hardships, while some bigger banks gained depositors.
The collapse of Silicon Valley Bank began when the Federal Reserve raised interest rates and the value of securities dropped. SVB reported an after-tax loss of $1.8 billion for the last three months of 2022 and said it would sell stock to raise $2.25 billion to cover its losses. This led to a panic, as depositors tried to withdraw $42 billion, effectively rendering the financial institution insolvent. The FDIC took control of SVB and was able to provide full access to all insured depositors by Monday morning.
Experts say the bank got into trouble because of large unrealized losses on government securities, which became a problem when the Federal Reserve raised interest rates and the value of securities dropped. SVB had bought up U.S. Treasury and mortgage bonds when interest rates were low, and as rates rose, the value of those assets fell. This was made worse by the fact that SVB had a lot of large and uninsured depositors, meaning it was not subject to a stress test by the Federal Reserve.
Senator Bernie Sanders and Senator Elizabeth Warren both said that the failure of Silicon Valley Bank was a result of the 2018 bank deregulation bill signed by Donald Trump, calling for stronger liquidity and capital requirements to withstand financial shocks.
The takeaway from the Silicon Valley Bank collapse is that banks need to be aware of the risks associated with their investments and manage their interest rate risk. Regulators also need to communicate to banks that they need to mark losses down from their capital to make sure their capital adequately reflects their true resiliency.
0. “Silicon Valley Bank's Distress Wasn't Reflected in Credit Ratings” The Wall Street Journal, 17 Mar. 2023, https://www.wsj.com/articles/silicon-valley-banks-distress-wasnt-reflected-in-credit-ratings-93cd9dff
1. “Here's who made money amid the Silicon Valley Bank turmoil” ABC News, 17 Mar. 2023, https://abcnews.go.com/Business/made-money-amid-silicon-valley-bank-turmoil/story?id=97877087
2. “After Twitter played a massive role in a historic $42 billion bank run, Elon Musk mused it was like 1929” Fortune, 15 Mar. 2023, https://fortune.com/2023/03/15/twitter-role-in-svb-42-billion-bank-run-elon-musk-mused-it-was-like-1929/
3. “Silicon Valley Bank's failure, the government's depositor rescue, and venture capitalists' incredible tantrum.” Slate, 13 Mar. 2023, https://slate.com/technology/2023/03/silicon-valley-bank-rescue-venture-capital-calacanis-sacks-ackman-tantrum.html
4. “PR-16-2023 3/10/2023” FDIC, 12 Mar. 2023, https://www.fdic.gov/news/press-releases/2023/pr23016.html
5. “What to Know About Trump-Era Bank Deregulation and Bank Failures” FactCheck.org, 16 Mar. 2023, https://www.factcheck.org/2023/03/what-to-know-about-trump-era-bank-deregulation-and-bank-failures/
6. “Opinion | The Boys Who Cried ‘Woke!’” The New York Times, 14 Mar. 2023, https://www.nytimes.com/2023/03/14/opinion/silicon-valley-bank-republicans-woke.html
7. “Former FDIC Chair on Bank Collapses, the Federal Reserve and “Potential Fragility” in the Financial System” PBS, 16 Mar. 2023, https://www.pbs.org/wgbh/frontline/article/former-fdic-chair-bank-collapses-federal-reserve/