Ajit Karn
Silicon Valley Bank (SVB) recently celebrated reaching Forbes magazine’s annual list of the top banks in America. In a Monday tweet, the bank conveyed its delight at being named to Forbes’ list for the fifth year in a row, as well as the publication’s inaugural Financial All-Stars list.
However, just five days later, the bank’s remark would take on a bitter irony when regulators seized control of the institution due to its inability to meet depositors’ withdrawal demands.
https://twitter.com/SVB_Financial/status/1632818336391213059
Silicon Valley Bank’s failure was the second-largest bank failure in U.S. history, after Washington Mutual in 2008. The inability of the bank to satisfy withdrawal requests precipitated a run on the bank, which prompted the California Department of Financial Protection and Innovation (DFPI) to assume control of the bank’s operations after it became insolvent. The assets of the bank have been transferred to the Federal Deposit Insurance Corporation (FDIC), which will begin returning insured deposits to Silicon Valley Bank depositors on Monday.
Prior to the closure, Silicon Valley Bank was the sixteenth largest lender in the United States. As a significant financier of tech ventures, the bank’s failure has sent shockwaves through the technology industry. Hundreds of businesses were impacted by the closure, including the retailer Camp and the coffee company Compass Coffee, which claim they cannot access their deposits.
As a result of the Federal Reserve’s increase in interest rates, bond prices declined, reducing Silicon Valley Bank’s portfolio’s market value. Bloomberg News reported that Silicon Valley Bank had “mark-to-market losses for held-to-maturity securities in excess of $15 billion at the end of 2022.”
According to experts, the bank’s demise appears to be the result of poor administration rather than a sign of larger problems in the financial services industry. Higher interest rates, declining tech stocks, and cutbacks in the industry all put pressure on the bank, which had invested the majority of its deposits in long-term government bonds.
Doug Holtz-Eakin, a former director of the Congressional Budget Office who also served on the Financial Crisis Inquiry Commission that investigated the global economic crisis of 2008, criticised the bank’s executives for making poor decisions. He claimed that the Silicon Valley Bank had poor administration of its Tier 1 capital, which was significantly concentrated in a single asset, and a limited clientele consisting of only tech companies in Silicon Valley. This resulted in the failure of the business model rather than the financial system.
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The failure of the bank has been felt all over the globe. Prime Minister of Israel Benjamin Netanyahu warned on Saturday that the collapse of Silicon Valley Bank has generated a severe crisis in the technology sector. The Israeli prime minister tweeted, “I am attentively monitoring the collapse of the American investment bank Silicon Valley Bank, which has caused a significant crisis in the high-tech industry.” “If necessary, out of a sense of responsibility to Israeli high-tech companies and their employees, we will take measures to help Israeli companies whose activity centre is in Israel withstand the cash-flow crisis brought on by the turmoil,” he said.
