The Collapse of Silicon Valley Bank: Examining the Causes and Examining Solutions
Silicon Valley Bank, a regional lender that specialized in tech startups, experienced one of the most significant bank runs in recent history last week. The collapse of Silicon Valley Bank is the second-largest failure of a financial institution in US history.
The bank’s customers, who were disproportionately tech-industry startups, are now left to wonder over the weekend if their deposits had gone up in one of those tiny mushroom clouds. The problem for Silicon Valley Bank’s customer base is that the vast majority of them had deposits well in excess of the FDIC’s now-$250,000 limit.
It is believed that the collapse of Silicon Valley Bank is the direct result of an absurd 2018 bank deregulation bill signed by Donald Trump that Senator Bernie Sanders, among others, had spoken out against. Senator Elizabeth Warren also made a similar point in an essay published in The Times, saying that had Congress and the Federal Reserve not rolled back the stricter oversight, Silicon Valley Bank and Signature Bank would have been subject to stronger liquidity and capital requirements to withstand financial shocks.
The ease with which Silicon Valley Bank’s customers could execute withdrawals and the speed with which news of Silicon Valley Bank’s impending demise spread were two factors that were particularly destabilizing for the bank. The speed of the news spread was fueled by the zero distribution costs for both rumors and withdrawals, which was so destabilizing for an entity predicated on arbitraging time.
On Monday, America's largest banks placed $30 billion in First Republic bank in an effort to stabilize the financial sector. The banks also released a press statement, saying that this support reflects confidence in First Republic and its ability to continue to provide exceptional service to its clients and communities.
The collapse of Silicon Valley Bank has raised serious questions about the stability of the tech industry’s financial infrastructure and the venture-capital apparatus that are too unstable, too risky, and too unmoored from reality to be left in charge of something as important as the direction of our technological development. As the nation’s largest financial institutions take action to help stabilize the financial sector, it is important to reflect on Silicon Valley’s culture and the tech industry’s role in SVB’s collapse in order to prevent similar events from occurring in the future.
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