Why Did Silicon Valley Bank Collapse?

Posted on Friday, April 14, 2023 by Lydia SinclairNo comments

On 10th March 2023, the financial world saw the largest bank collapse since the 2008 financial crisis and the second largest in history, with considerable consequences not only for forensic accounting jobs but for the wider financial world and startup companies.

The Silicon Valley Bank (SVB) was one of three banks, alongside Silvergate Bank and Signature Bank, to close in March 2023. All three were based in California and all three primarily focused on new technologies and businesses such as cryptocurrency (although not directly in SVB’s case).

The fact that all three of them collapsed so close to each other sparked concerns about the risk of economic contagion, where the consequences of one financial collapse sparks a chain reaction in the rest of the banking system.

A good example of this is the collapse of the bank Northern Rock, which was nationalised as a consequence of a global banking crisis in 2008, itself a consequence of a subprime mortgage default crisis. In this case, the ultimate end was the bankruptcy of Lehman Brothers and a global financial meltdown.

In the case of Silvergate and Signature bank, their connection to cryptocurrency and particularly the collapse of FTX led to their collapses, but SVB’s problems were more complex.

Government institutions have stepped in to protect people’s money and attempt to restore confidence in the sector, but to know about the potential effects and long-term consequences, we need to know why, and whether SVB is a unique case or the canary in the coal mine.


A Bank For Startups

Silicon Valley Bank was founded in 1983 as a financial institution designed to meet the needs of startup companies, who are inherently riskier clients that are unlikely to make money immediately, often taking significant shares in a company as collateral.

This served it well, and it managed to weather the storm of both the dotcom collapse and the global financial collapse.

However, despite being the 16th largest bank in the United States, its situation was far more precarious than it realised.

It may have realised this issue had the 2018 Economic Growth, Regulatory Relief and Consumer Protection Act not been passed, which eased financial regulations and increased the threshold of when a bank is considered “too big to fail”.


Moving To Long-Term Bonds

In 2021, SVB started to purchase long-term treasury bonds instead of short-term ones to improve their return on investment, which meant that large amounts of SVB’s assets were locked away in long-term bonds, although this would only be a problem if they needed liquid assets quickly.

Unfortunately, the exact situation that would cause such an issue came to pass.


Rising Interest Rates

Throughout 2022 and into 2023, inflation was a major concern, and many national banks and reserves were increasing interest rates to try and reduce inflation to meet specified targets.

This had two major gigantic effects on SVB. First of all, it made their long-term bonds far less valuable and attractive to investors. This would have been less of an issue had the other major effect not existed.

Rising interest rates also made private finance harder to come by for startup companies, which meant that to meet payroll and pay for their operations, startups were withdrawing money from SVB that SVB did not itself have to hand.


Fire Sale

SVB went from being in sound financial health to being insolvent exceptionally quickly, and to try and fix this, they sold all of their available securities at a loss that totalled $1.8bn.

This, alongside selling company stock, led to a collapse in client confidence and led to a bank run which destroyed SVB entirely.

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