Shockwaves of Silicon Valley Bank Failure: A Look at the Systemic Risk
The collapse of Silicon Valley Bank on Friday marks the second-largest bank failure in US history, and has sent shockwaves through the tech sector.[0] Founded in 1983 to provide banking services to Silicon Valley’s growing tech startups, the bank had been a pillar of the industry for decades, catering to almost half of all venture-backed tech and healthcare companies in the US.[1]
The failure came to light when SVB Financial Group, the bank’s parent company, announced on March 8th that it had sold $21 billion of assets at a $1.8 billion loss and was going to sell $1.75 billion in new shares to help plug the hole.[2] Investors panicked, and the stock price plummeted. Depositors then tried to withdraw $42 billion, rendering the financial institution insolvent.[2]
Normally, the FDIC would insure deposits up to $250,000.[3] But SVB had around 90% of its accounts with more than $250,000 in deposits, leaving many of its customers without the insurance guarantee.[4] To prevent further contagion and bank runs, the government stepped in to guarantee all deposits at the two failed banks and opened a facility to make funding available for other financial institutions.[5]
But the underlying problem still remains.[6] SVB was so heavily concentrated in one industry that it became vulnerable when things got bad.[7] The bank was also subject to weak risk management practices, and did not diversify its investments or consider the fact that it had a high number of uninsured deposits. The FDIC and the Fed’s actions may have prevented a wider spread of the crisis, but they don’t address the systemic risk and lack of oversight that allowed the collapse to happen in the first place.
0. “The collapse of Silicon Valley Bank, explained visually” USA TODAY, 15 Mar. 2023, https://www.usatoday.com/story/graphics/2023/03/13/graphics-bank-collapse-silicon-valley/11466073002/
1. “Silicon Valley Bank: How a digital bank run accelerated the collapse” ABC News, 14 Mar. 2023, https://abcnews.go.com/Business/silicon-valley-bank-digital-bank-run-accelerated-collapse/story?id=97846569
2. “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
3. “Will the FDIC's move to cover uninsured deposits set a risky precedent?” NPR, 14 Mar. 2023, https://www.npr.org/2023/03/14/1163295661/will-the-fdics-move-to-cover-uninsured-deposits-set-a-risky-precedent
4. “Silicon Valley Bank: Who's to Blame?” City Journal, 13 Mar. 2023, https://www.city-journal.org/silicon-valley-bank-who-is-to-blame
5. “Silicon Valley Bank bailout: Did the government just bail out SVB and Signature?” Vox.com, 13 Mar. 2023, https://www.vox.com/money/2023/3/13/23638417/svb-bank-bailout-signature-fed-fdic-treasury-janet-yellen
6. “‘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
7. “What is Silicon Valley Bank? The bank’s collapse, explained.” Vox.com, 14 Mar. 2023, https://www.vox.com/technology/23634433/silicon-valley-bank-collapse-silvergate-first-republic-fdic
