The Silicon Valley Bank collapse: Is it the start of a banking crisis?

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Silicon Valley Bank collapse

On the 10th March 2023, the US banking system was shaken up by what is perceived to be the largest bank failure since 2008 – the collapse of a major industry player SVB (Silicon Valley Bank).

The notable event has caused a lot of uncertainty surrounding the banking system and speculation of a potential upcoming financial crisis.

This article will look into the key factors that contributed to the failure of Silicon Valley Bank as well as what it means for the future of banking. 

What caused SVB’s collapse?

Founded in 1983, Silicon Valley Bank was the 16th largest US bank with assets worth around $210 billion and specialized in service tech companies, venture capitalists, and startups (a lot of which are based in Silicon Valley).

The bank has seen significant growth during the pandemic, between 2020 and 2022 – as the tech industry rocketed, SVB’s deposit base tripled in size. 

Many agree that the primary reason for the company’s failure is how it dealt with the newly gained funds.

Instead of investing them back into the tech industry, the bank placed a huge chunk of the short-term deposits into long-term mortgage bonds and Treasury bonds.

By doing so, they aimed to receive low but stable returns, however, this strategy backfired with the rapid rise of interest rates over the past year. As a result, the value of SVB’s bonds have massively dropped, causing the bank to become insolvent. 

In addition to this, some large tech firms have withdrawn money from SVB in the weeks following up to its failure, due to the current challenges in the industry, unexpectedly forcing the bank to sell some of its bonds.

Consequently, this has caused somewhat of a panic from other clients and investors, who rushed to withdraw their funds too, further pummeling SVB’s liquidity. 

What have been the consequences?

The collapse of the Silicon Valley Bank has affected investors and tech businesses that were holding funds at the bank – some of the major ones include Etsy, Roblox, Vox Media, and Roku.

The event has sparked a lot of fear and uncertainty in both the US banking system and the tech industry in general, with concerns of other banks following its fate.

The fact that two smaller similar organizations, Signature Bank and Silvergate Capital, have also failed over the same weekend has further escalated the situation. 

Many other banks are already affected by the significant drop in the stock market in the aftermath of Silicon Valley Bank’s collapse.

However, many of the major banks, including JP Morgan, First Republic Bank, and Western Alliance Bank, have issued statements to calm down their investors and customers, claiming to remain fully capable of funding their customers. 

How has the government responded?

The US government has been quick to respond to the shock across the financial system, as president Joe Biden reassured the safety of the banking system. US stock futures steadied shortly after the indication that US regulators were working hard to restore confidence.

As to what are Futures in this context – they’re an ideal way to indicate investor expectations within the banking system.

The Federal officials have promised to do everything in their power in order to avoid any losses for taxpayers as a result of recent bank closures.

Both SVB and Signature Bank are now operated by the FDIC, which will ensure that customers are able to access their funds before the banks cease to exist. They will guarantee protection of up to $250,000 pay-outs per each different type of account held, regardless of whether or not they are insured. 

In addition to this, the government has been introducing other measures in attempts to avoid further SVB failure’s implications for the banking market.

The Fed announced the creation of an emergency lending program, providing loans to other financial institutions with a safety net of an additional source of liquidity. The funding will help them meet the increasing withdrawal needs due to the ongoing panic. 

Is this the start of a crisis?

There is a lot of speculation regarding an upcoming financial crisis, with many comparing the event to the devastating economical crisis of 2008. While that is difficult to predict, many industry experts believe that the comparisons are not valid, given that the reasons behind collapsing in both events are vastly different.

Not only that, SVB is relatively smaller in size than the largest players in the market, which at the current stage are not showing signs of concern. 

On the other hand, the failure of SVB could still have significant effects on smaller banks and businesses, particularly firms operating in the tech industry, startups, and venture capitalists.

The fears caused by the recent events could drive other investors and depositors to lose trust in the institutions and withdraw large amounts of funds, therefore putting them at risk. 

In conclusion, the unexpected collapse of Silicon Valley Bank as well as a few other banks have undoubtedly put a lot of pressure on the US banking system.

While many of the bank industry experts, including the Fed officials, believe the events will not have broader implications on the economy, the initial crisis and confidence in the financial systems are yet to be restored. 

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