Silicon Valley Bank Failure

By Aniela Apteker ’24

Bank failures are defined by insolvency — when a bank doesn't have enough liquidity to return customer deposits in cash. Since the establishment of the Federal Deposit Insurance Corporation (FDIC), a government agency that protects customers' deposits, there have been 3,516 bank failures in the US. However, the most stunning failure occurred within two days in March of 2023 at the beloved Silicon Valley Bank.
 
The Silicon Valley Bank, most commonly referred to as SVB, was heavily impacted by its failure to diversify its investment portfolio, which, in turn, constitutes a solid concentration of companies from the same industry. When inflation rose, and the tech companies struggled to gain support from venture capitalists, it hit the bank all at once. So, when one company in an industry decides to withdraw its deposit, it is likely that others will quickly follow in their footsteps and "run" to the bank to withdraw before the bank has used up its liquidity. However, like other banks, SVB only had a limited amount of cash readily available while the rest was invested. To compensate for its lack of liquidity, the bank chose to sell its bonds at a loss to generate more cash, incurring a considerable loss quickly. The SVB needed more liquidity to allow all its customers to withdraw and protect their deposits, and it needed to prepare and be capable of handling this situation, given the overwhelming number of companies in the same industry.
 
As The New York Times describes, the essential question behind the government's intervention strategy was: "Could the failure of Silicon Valley Bank, the mega start-up lender that had just collapsed, spread to other banks and create a systemic risk to the financial system?" The legitimacy of this question was supported by the influx of bank runs across the country, risking a potential domino effect of insolvency. In the days after SVB was shut down, debates contemplated the limits of the government's rescue and the possible impact on the economy and banks nationwide. Ultimately, the Treasury, the White House, and the Federal Reserve Bank announced that all depositors would be fully repaid, and the Federal Reserve would "offer a program providing attractive loans to other financial institutions in hopes of avoiding a cascading series of bank failures." Of course, like all else, these decisions had boundaries set to ensure that the government didn't come to the rescue prematurely or excessively. While the Federal Reserve promised to pay back depositors in whole, surpassing the initial guarantee of $250,000, investors who owned stock in the SVB Financial Group were more susceptible to losing money as their investments were unsecured.
 
I agree with the governmental institutions' varying responses to the SVB's failure. By not tapping into taxpayers' money to pay back depositors and instead using funds from the Federal Reserve, the government was able to instill some security and peace of mind for citizens nationally – also restraining the bank's failure from becoming more of a national unrest than it already was. In addition, the guarantee of deposits being paid back entirely was a necessary step in preventing the domino effect of bank runs nationwide; it also, in some capacity, protects the legitimacy of the industry and banks that work closely with Silicon Valley companies. While it's true that despite all the government did to prevent the nation from going haywire and to pay back original depositors, many investors who held unsecured shares were at risk of losing money. But, with all else, I think that to ethically consider the government's cap on intervening, it must be acknowledged that investments in themselves are risks, and one of the risks investors should be wary of — despite its rarity — is bank failure.
 
As The New York Times describes, the SVB failure was caused by the influx of bank runs, which quickly caused the bank to become insolvent. Claiming that "banking is an enterprise that relies as much on confidence as on cash – and if that runs out, the game is over." SVB lacked efficiently executed risk management and regulatory oversight, both of which heavily contributed to the bank's rapid downfall. As mentioned, I believe that the government's steps in securing repayment without relying on taxpayer money and in working towards creating educational programs to prevent bank failures are the backbone to successfully de-escalating a possibly more significant issue.
 
 
Works Cited:
Sorkin, A. R., Mattu, R., Warner, B., Kessler, S., Merced, M. J. D. L., Hirsch, L., & Livni, E. “Why did Silicon Valley Bank collapse?” The New York Times, March 11, 2023. Accessed April 4, 2024. https://www.nytimes.com/2023/03/11/business/dealbook/silicon-valley-bank-collapse.html

“The Silicon Valley Bank collapse explained.” UW School of Law, March 24, 2023. Accessed April 4, 2024. https://www.law.uw.edu/news-events/news/2023/svb-collapse

Rappeport, Alan., Hirsch, Lauren., Smialek, Jeanna., Tankersley, Jim. “How Washington Decided to Rescue Silicon Valley Bank’s Depositors”. The New York Times, March 14, 2023. Accessed April 4, 2024. https://www.nytimes.com/2023/03/14/us/politics/inside-silicon-valley-bank-rescue.html
 
Gobler, Erin. “What Happened to Silicon Valley Bank?” Investopedia, February 27, 2024. Accessed April 4, 2024. https://www.investopedia.com/what-happened-to-silicon-valley-bank-7368676#:~:text=The%20Federal%20Reserve%20took%20steps,addition%20to%20certain%20other%20assets