Diversification is Key: Lessons Learned from the Collapse of Silicon Valley Bank
The collapse of Silicon Valley Bank last Friday is yet another cautionary tale of the perils of banking and investing in a concentrated sector of the economy.[0] Founded in 1983 as a bank for the emerging California tech world, SVB became the go-to lender for tech startups that were deemed too risky in the eyes of larger, more traditional banks.[1] Over the years, SVB’s deposits had tripled to nearly $200 billion, and the bank took advantage of its status as being just under the threshold for heightened federal regulation to take enormous risk.[2]
Unfortunately, by taking such risks, the bank was vulnerable to the economic cycles of the market. As the Federal Reserve has increased interest rates, the value of older Treasury bonds issued at lower interest rates—which the bank held—began to fall.[2] SVB’s clients started to panic and tried to withdraw $42 billion, effectively rendering the financial institution insolvent.[3]
SVB’s management, like so many in the Valley before it, had failed to take into account the realities of the market until it was too late.[0] The bank had invested its short-term deposits—that is, money that customers could withdraw at any time from their checking and savings accounts—in long-term Treasury bonds, a strategy that works for all banks, but that SVB had taken too far, too fast, with zero room for error.[2]
The bank’s collapse was precipitated by massive withdrawals, which were in turn precipitated by depositors reading an update on its finances posted on March 8, inferring that it was in trouble, and publicizing this finding on social media.[4] SVB’s bid to raise capital failed, and regulators swiftly intervened.[5]
The FDIC eventually stepped in to guarantee all Silicon Valley Bank deposits, but it is worth noting that the law states that only deposits up to $250,000 are insured.[6] From 1980–1987, when the savings and loan crisis started, 24% of bank failures led to losses for depositors. However, due to the financial crisis and the introduction of protective measures, that number decreased to 6% from 2009–2013.[4] From 1992 to 2007, an astounding 65 percent of bank failures resulted in a loss of deposits.[4]
The collapse of Silicon Valley Bank should serve as a reminder of the importance of diversification in investing and banking.
0. “Silicon Valley Bank collapse sets tech industry up for bigger crisis” Business Insider, 15 Mar. 2023, https://www.businessinsider.com/silicon-valley-banks-collapse-tech-venture-capital-industry-bigger-crisis-2023-3
1. “‘Lungs of the startup world’: bank fall upends most Silicon Valley industries” The Guardian, 15 Mar. 2023, https://www.theguardian.com/technology/2023/mar/15/silicon-valley-bank-failure-industries-investors-rattled
2. “Silicon Valley Bank: Who's to Blame?” City Journal, 13 Mar. 2023, https://www.city-journal.org/silicon-valley-bank-who-is-to-blame
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. “The Silicon Valley Bank collapse couldn’t have happened in this one state” Vox.com, 15 Mar. 2023, https://www.vox.com/policy/23636583/silicon-valley-bank-collapse-fdic-deposit-massachusetts
5. “Why Investors Should Care About the Banking Scare” Morningstar, 14 Mar. 2023, https://www.morningstar.com/articles/1144082/why-investors-should-care-about-the-banking-scare
6. “Opinion | How Bad Was the Silicon Valley Bank Bailout?” The New York Times, 14 Mar. 2023, https://www.nytimes.com/2023/03/14/opinion/silicon-valley-bank-bailout.html
