Explainer: Unraveling the Silicon Valley Bank Collapse and Its Implications
Silicon Valley Bank collapsed due to early investment decisions combined with rising interest rates, leading them to sell their bonds at steep losses, which spooked investors and customers into panic, who withdrew millions of dollars within the span of 48 hours.
Founded in 1983, Silicon Valley Bank was an instrumental engine for the successes of nearly half of all US tech startups and life science companies and was the 16th largest commercial bank in America. Some of their early investment decisions included buying long-term bonds when interest rates were nearly zero at the time. In order to slow inflation, however, Federal Reserve Chair Jerome Powell increased interest rates during the pandemic, which made SVB’s long-term bond prices drop, making them worth less money. Since interest rates rose, startups withdrew more of their money to compensate, and SVB had to sell their assets at an enormous loss to come up with cash to meet depositor demands.
On March 8th, 2023, Silicon Valley declared that they had suffered a $1.8 billion after-tax loss, after selling $21 billion of securities and were in urgent need of raising more funds to address customer concerns. The stock market reacted harshly, leading to SVB losing over $160 billion dollars in value in just under 24 hours. As a result, alarmed investors withdrew billions of dollars in deposits on March 9th, worth a quarter of the bank’s total deposits. Since SVB was not able to accommodate the large amounts of cash that were being pulled all at once, a bank run was in full swing. A bank run occurs when customers rush to banks to withdraw their money due to the loss of confidence in the bank, which could cause a systemic financial crisis. The Federal Deposit Insurance Corporation (FDIC) had to take over the SVB on Friday, March 10th, to assure the depositors that they will get access to their money by Monday.
President Joe Biden responded to the second-biggest bank failure in US history by stating that, “Americans can have confidence that the banking system is safe. Your deposits will be there when you need them,” and reassured the public that no taxpayer money is going towards solving the crisis. He added, “Instead, the money will come from the fees the banks pay into the deposit insurance fund.” The Biden administration intends to ask banking regulators and Congress to bolster regulations for banks to prevent future disasters.
The aftermath of the collapse had a ripple effect on the economy. The crisis could likely lead to more intense scrutiny of regional banks of all sizes and statures since financial regulators will face pressure to tighten their surveillance of regional banks. Share trading in nearly a dozen regional banks had halted on Monday, March 13th, as nervous investors bailed. SVB’s collapse does not signal trouble for the banking system at large because it was a “unique bank that grew rapidly in a very specific niche industry, while the broader banking system is regularly stress-tested, has added meaningful liquidity and capital over the past decade, and has worked to manage balance sheets conservatively," wrote Matt Reed, manager of the Fidelity Select Financial Services Portfolio.
Reed asserts that, "While markets are likely to worry, it doesn't look like there is meaningful spillover into the broader banking system and the economy.” The FDIC and Treasury launched a program that aims to advance funding for up to one year to eligible financial institutions to stave off future bank runs that threaten the banking system, its stability, and the economy at a large scale.
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References and Further Reading:
Fidelity. “Silicon Valley Bank: What Happened? | Fidelity Investments.” Www.fidelity.com, 21 Mar. 2023, www.fidelity.com/learning-center/personal-finance/silicon-valley-bank-collapse. Accessed 3 Apr. 2023.
Kenton, Will. “What Happens in a Bank Run.” Investopedia, 2019, www.investopedia.com/terms/b/bankrun.asp. Accessed 3 Apr. 2023.
Lopatto, Elizabeth. “The Tech Industry Moved Fast and Broke Its Most Prestigious Bank.” The Verge, 12 Mar. 2023, www.theverge.com/23635692/silicon-valley-bank-svb-collapse-explainer-startups-venture-capital. Accessed 3 Apr. 2023.
Padilla, Carlie Procell and Ramon. “Silicon Valley Bank Collapse Explained in Graphics.” USA TODAY, 13 Mar. 2023, www.usatoday.com/story/graphics/2023/03/13/graphics-bank-collapse-silicon-valley/11466073002/. Accessed 3 Apr. 2023.
Thomson-DeVeaux, Amelia. “What Does the Silicon Valley Bank Collapse Mean for the Economy?” FiveThirtyEight, 14 Mar. 2023, www.fivethirtyeight.com/features/the-silicon-valley-bank-collapse/#:~:text=To%20raise%20the%20capital%20they. Accessed 4 Apr. 2023.
Ziady, Hanna. “Why Silicon Valley Bank Collapsed and What It Could Mean | CNN Business.” CNN, 13 Mar. 2023, www.cnn.com/2023/03/13/investing/silicon-valley-bank-collapse-explained/index.html. Accessed 3 Apr. 2023.
