A bank collapse is no small thing, not even for an investor’s bank that doesn’t serve the average person. Just look at Washington Mutual, whose lost assets totaled over $400 billion in today’s money.
Unfortunately, bank collapses are as inevitable as death or taxes. There’s a new one every few years, and the fallout is disastrous for all involved. The latest of the bunch is the Silicon Valley bank collapse.
This most recent banking collapse has much in common with previous ones. However, it’s worth taking a closer look at the Bank of Silicon Valley, and what led to its untimely demise in particular.
What Is the Silicon Valley Bank?
The Silicon Valley Bank has been around for four decades already. In recent years, this bank has been the primary source of funding for tech start-ups. Start-ups need a lot of venture capital to begin and run their business, and so they often go to banks to get that capital.
If you haven’t heard of Silicon Valley, don’t worry. This bank did not serve the general public, such as everyday workers. Rather, this was an investor bank dedicated to venture capitalism.
What Caused the Silicon Valley Bank Collapse?
It’s difficult to say what the exact cause was, even now a couple of months after the collapse. What we do know for sure is that in March, investors rushed to withdraw funds. In two very short days, the company became completely insolvent and collapsed.
Federal regulators had to step in and get a hold of the situation. They closed the bank for good on March 10. Even now, many of those investors are awaiting compensation for their lost funds.
As with any bank collapse, the federal government took over any remaining Silicon Valley Bank assets. They sold what they could, and disbursed funds to those who needed them. You can read more about private market funds here.
As we’ve said, the exact causes of the collapse are unclear. But here are some factors that experts believe contributed to the Silicon Valley Bank failure.
Trump Era Deregulation
Much of Trump’s presidency saw a reduction in regulations across many industries. He removed regulations for lightbulbs as much as clean energy requirements. One of the most notable was bank deregulation.
Before Trump, banks had to keep at least $50 billion in liquid assets on hand at all times. The rule comes from Dodd-Frank, a law intended to prevent the collapse of large banking institutions.
In addition to a requirement for a minimum of assets, banks would experience a “stress test” by the federal government. This would determine if they were solvent and able to withstand market fluctuations.
Trump and his administration determined that this was an old law that needed to go. So, in 2018, they removed it. Trump claimed that the regulation was killing jobs, despite warnings from economists against removing it.
Of course, Trump was wrong and SVB had a massive failure just five years after the deregulation came into place. It’s obviously bad news when the bank doesn’t have enough money for a sudden bank run.
Poor Risk Management
Every bank needs to have a CRO, or Chief Risk Officer. In essence, this job is all about assessing risk and avoiding the sorts of situations that lead to a collapse.
SVB did have a chief risk officer, but that post went vacant in 2022. There were multiple vacancies until the post had its final sitting CRO. At the very end, there were reports of very frequent meetings in the risk assessment department.
We do know that SVB was trying to hide something because of the frequency of these risk meetings. What they were trying to hide is up for debate. Some say they knew what was going to happen, and others say they were arguing about risks that they were taking–or going to take.
Whatever the case, SVB has some amount of culpability for taking on too much risk.
Poor Interest Practices and Failure to Account for Inflation
One of the reasons that SVB rose to prominence in its early days was because of its interest-free investments. These early-day investments, in other words, earned the bank no money. To account for this, they backed these investments with US bonds.
This was a risky way to back the investments. It meant that the value of these bonds was subject to inflation and a lowering of interest rates–affecting the investments they were tied to. This is exactly what happened.
SVB had to sell their US bonds at a loss due to this decrease in interest rates and increase in inflation. Word of the decision got out to investors on social media. A bank run ensued, with thousands pulling out their money in a mad rush all at once.
This is why the collapse was so sudden. Many bank collapses happen over the course of a week, sometimes longer. SVP was gone in less than 48 hours.
What Do We Do Now?
Right now, the primary concern is not just that investors get their money back. Rather, the concern is about the looming recession. If more banks fail, then the fallout could be massive for everyone regardless of financial status.
Our advice to readers is to wait for an official verdict. The investigation is still ongoing, and until we have the final result, speculation won’t do much good. In the meantime, the federal government is doing its best to prop up any other banks that show signs of failing.
Learn More About Finances
The Silicon Valley Bank collapse is the largest collapse of any bank since 2008. What caused it is initially unclear until further investigation, but we do have some hints. In the meantime, the Biden administration will add bank regulations, and the federal government will keep other banks afloat.
