In March 2023, the California Department of Financial Protection and Innovation (DFPI) ordered the closure of Silicon Valley Bank (SVB).
The Santa Clara, California-based bank failed for a number of reasons, including a sharp drop in the value of its holdings and heavy withdrawals from depositors.
By the end of March, First Citizens Bank had acquired all of the bankrupt bank’s deposits and loans.
More than five hundred banks failed between 2001 and the beginning of 2023, so this is not an unprecedented occurrence.
But this one stood out from the rest. It was the largest bank to fail since Washington Mutual went under in 2008, and it happened at a time when many Americans were already worried about a recession.
Here, we’ll delve a little deeper into the history of Silicon Valley Bank, the events leading up to the collapse, and the implications for depositors, investors, and the economy at large to help you understand what went wrong.
KEY POINTS
- The 16th largest bank in the United States, Silicon Valley Bank (SVB), was closed by federal regulators on March 10, 2023.
- Several causes contributed to the bank’s demise, including a decline in the value of the bank’s investments and a significant outflow of funds from depositors. It was management, the regulator, and social media, according to the Federal Reserve’s assessment.
- After the crash, federal regulators said they would reimburse depositors in full, including for funds that weren’t insured by the FDIC.
- After the fall of SVB, the Federal Reserve established the Bank Term Funding Program and other measures to restore public trust in the banking sector and forestall similar crises in the future.
- After negotiations with the FDIC, First Citizens Bank agreed to acquire SVB’s deposits, loans, and other assets.
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About Silicon Valley Bank.
SVB Financial Group’s Silicon Valley Bank (SVB) was the 16th largest bank in the country. By the end of 2022, the bank had amassed around $209 billion in assets.
Silicon Valley Bank was well-known for its work with startups and venture-backed businesses, while it served businesses of all sizes.
The website boasts that in 2022, Silicon Valley Bank served as the underwriter for 44% of all IPOs in the healthcare and technology sectors supported by venture capital.
Background of The Silicon Valley Bank
The concept for Silicon Valley Bank was developed by Bill Biggerstaff and Robert Medearis over a game of poker.
They opened the bank’s first branch in San Jose, California, in 1983, and CEO Roger Smith was there to help.
In 1988, it went public, and in 1989, it relocated to Menlo Park to strengthen its position in the venture capital industry.
Over time, Silicon Valley Bank expanded to become a major player among American commercial banks.
From 2019 through 2022, the years of the epidemic and its aftermath, the bank nearly quadrupled in size, moving from the 34th to the 16th largest in the world.
What Went Wrong at Silicon Valley Bank?
Between 2019 and 2022, Silicon Valley Bank had tremendous expansion, resulting in a sizable deposit base and asset base.
While some of the funds were kept in liquid assets, the vast majority was invested in long-term debt instruments like Treasury bonds. These investments often yield poor returns, but carry low risk.
Bonds issued by Silicon Valley Bank became riskier investments as interest rates were raised by the Federal Reserve in reaction to excessive inflation.
Silicon Valley Bank’s bonds lost value as a result of investors’ ability to purchase bonds at higher interest rates.
Many customers of Silicon Valley Bank, who work in the tech sector, began withdrawing money at this time as they had financial difficulties.
Silicon Valley Bank had to sell investments at a loss to make up for the money that was being withdrawn in such big amounts.
The $1.8 billion in losses suffered by SVB were the beginning of the collapse for the bank.
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The repeal of the Dodd-Frank Act, the key banking regulation enacted in response to the 2008 financial crisis, is seen by some as the genesis of Silicon Valley Bank’s demise.
Dodd-Frank stipulates that financial institutions with more over $50 billion in assets must submit to heightened regulation.
But President Trump’s 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act made major changes to that mandate. The 2018 law no longer has a threshold of $50 billion, but rather $250 billion.
Silicon Valley Bank, the sixteenth largest bank in the country, didn’t have enough assets to be subject to the additional laws and oversight.
SVB would have been subject to closer scrutiny from authorities had the threshold never been adjusted.
SVB’s senior management team mismanaged the investment risk of their balance sheet, and the board of directors failed to serve as a check on senior management, according to a report issued by the Federal Reserve on April 28, 2023.
The Fed also placed some of the blame for the bank’s demise on its own regulatory staff for failing to spot red flags during the bank’s fast expansion between 2019 and 2021 and for failing to take decisive action on serious flaws it did uncover relating to risk management.
The Fed also mentioned the influence of social media with a highly networked and concentrated depositor base, as well as the 2018 adjustment in Fed supervisory criteria.
Stay tuned for part 2.
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