The fall of the Silicon Valley Bank (SVB) marks one of the largest economic disruptions to the banking system since the 2008 financial crisis. In a quick turn of events, regulators were forced to close the bank after having insufficient funds to return deposits. The fall of the bank may have seemed sudden, but it was anything but. It was a series of decisions that the bank management made throughout the last couple of years that slowly built into this economic disaster.
One major factor for this failure is the risky business models that the bank utilized to make profits. In a typical banking system, the majority of assets are accounted for by the loans that banks give out, and the banks make money through interest. However, SVB’s assets were mostly stored in the securities. According to the Wall Street Journal, over 70 percent of their assets were made of securities.
SVB’s main clients were corporations and individuals in the tech sector. As a result of the tech boom in the last couple of years, tech companies deposited large sums of money into the bank. SVB, with all this money on their hands, invested it in US treasury bonds, a form of security that is traditionally thought by bank management to be a safe investment that would steadily rise in value.
There are multiple problems with having such a large amount of securities. Securities are subject to any fluctuations in the market, such as interest rate alterations, which can make the bonds drop significantly in value. Furthermore, investing such a large amount of deposits into securities would result in the banks having little liquid assets on hand.
These problems came into fruition in 2022, when the Federal Reserve declared that they would be raising the interest rates, and in turn decreased the value of the bonds. The longer the terms are for the bonds, the more its value will decline when interest rates are increased.
As a result, SVB’s huge amount of US treasury bonds lost 1.8 billion dollars in value. After this reported loss, depositors panicked and rushed to retrieve their money from the bank, also known as a bank run. This forced the bank to sell their remaining bonds to get the cash required to pay back these deposits. Bank regulators seized the bank, and declared its failure after SVB was unable to cash out open accounts.
There are several things that can be learned from this economic disaster. First, banks should take the proper measures in regards to interest rates and the amount of liquidity present to prepare for economic fluctuations. SVB failed to seriously consider the consequences of their large investment in US Treasury bonds, which led to the eventual bank run during 2023. Second, federal regulators should work with bank managers to come up with better strategies and systems for existing problems. In this situation, regulators were able to identify problems early on with SVB’s management of interest rates and liquidity, but no steps were taken to combat these issues. And finally, banks and regulators should work together to gradually insure uninsured deposits, so that bank-run occurrences can be minimized.
If financial institutions learn from SVB’s experiences and strictly follow the guidelines as laid out previously, such turmoil can be avoided in the future.