Collapse of Silicon Valley Bank reveals US Economy’s Instability
Customers and bystanders line up outside Silicon Valley Bank in Wellesley, Massachusetts. Photo: AP Photo/Steven Senne
Mar. 10 marked the second largest bank collapse in US history since the 2008 financial crisis. Known widely as a prominent leader in tech start-up, Silicon Valley Bank (SVB) has officially been seized by the Federal Deposit Insurance Corporation (FDIC) and filed for bankruptcy. This has put over $175 billion worth of customer deposits under the FDIC, creating widespread uncertainty for long-time clients. This month, the collapse has already set forth a series of shockwaves in the global financial sector, alarming the US economy of further bank turmoil caused by the lack of risk oversight, poor investment decisions, and the Fed’s rising interest rates.
Since 2011, SVB’s CEO Greg Becker envisioned the bank as an advocate for emerging entrepreneurs, offering large pay packages to engender loyalty from venture capitalists and innovative investors. However, problems began escalating when SVB’s stock plummeted to 60 percent due to an experienced run on deposits.
Despite positive growth in deposits that brought them up to $189.2 billion in 2021 from $102 billion in 2020, SVB miscalculated the returns on investment and made an outsized bet on long-term bonds when interest rates started rising. Consequently, SVB suffered a $1.8 billion after-tax loss through their investments, weakening its ability to pay clients back and raise the needed capital. Nonetheless, according to a joint statement by the Treasury, Federal Reserve, and FDIC, they promised that “no losses will be borne by the taxpayer” and “depositors will have access to all of their money.”
Soon after SVB’s collapse, other banks felt unwavering financial pressure. Investors from more niche institutions such as First Republic, Signature Bank and Western Alliance have dumped bank stocks and withdrawn their money. New York’s Signature Bank, in particular, was brought to failure instantly due to high amounts of uninsured deposits and tech-focused lending, prompting state regulators to seize the bank as a means of financial stabilization.
On Mar. 19, the Fed pushed interest rates to a range of 4.75 percent to 5 percent to limit spending, increase the cost of borrowing, and slow down lending. With these tighter credit conditions, the Fed aims to cool down the economy; however, the drastic increase in prices can be seen to negatively impact business and consumer behavior — sparking conversations about a potential economic recession on its way.
Federal Reserve Board Chair Jerome Powell gives an update on interest rates at the Federal Reserve on Wednesday in Washington. Photo: AP Photo/Alex Brandon
Are other banks at risk? Small to midsize banking institutions are potentially at risk of crippling investor confidence, especially within the tech industry. Emerging markets for clean energy and climate technology are likewise on a decline as tech-focused lenders cannot commit to the billions of dollars they had initially promised in operating loans.
With these issues unfolding, the Fed’s new Bank Term Funding Program was quickly implemented to provide additional emergency loans worth around $300 billion for banks to resolve unmet needs. Certainly, the recent banking crisis has brought heightened attention to mitigating another great economic recession. As Russ Porter, CFO of the Institute of Management Accountants, suggested, the SVB collapse stresses the importance of diversification and avoiding overconcentration in one market segment to spread risk and limit failure.