Forbes Magazine on the 14th of February 2023 listed America’s best banks and Silicon Valley Bank was ranked number 20 and has been on the list for five years in a row. Founded in 1983 Silicon Valley Bank was the 16th largest bank in the United States and had over 209 billion dollars in assets yet in a few short weeks the bank would go up in flames over the course of a couple of days. Silicon Valley Bank collapse set off a panic not seen since the days of the financial meltdown of 2008. The collapse of Silicon Valley Bank is causing shock waves across the entire business world with the FDIC now in control customers can access up to 250 thousand dollars on Monday but as ABC’s Jaclyn Lee explains, that’s not enough for many companies left struggling to manage their finances, reports Coldfusion.
The crash created a cascade of events some smaller Regional Banks lost the majority of their valuation and another has since collapsed companies. Government is at work trying to minimize the effects of the crash and at the same time the rest of the economy is trying to figure out what the long-term consequences of this Disaster may be. This is the largest bank failure since 2008 and the second largest in history. But how did a bank go from making the list of the best banks to bankrupt in less than a month?
The Current State of the US Banking System
The US banking industry is an integral part of the American economy, providing financing and other financial services to businesses and individuals alike. However, recent developments have raised concerns about the stability of the banking system, particularly in light of the ongoing COVID-19 pandemic and other economic challenges. At the heart of the US banking crisis is the issue of bank solvency. In recent years, many banks have taken on large amounts of debt and made risky investments, leaving them vulnerable to financial shocks and potential insolvency. This problem has been exacerbated by the ongoing pandemic, which has led to widespread business closures and job losses, putting additional strain on banks and their customers.
One institution that has been particularly hard hit by these challenges is the Silicon Valley Bank. As a major lender to the tech industry, the bank has seen a significant increase in defaults on loans and other financial products, leading to failure of its overall stability and potential impact on the broader economy.
What happened with Silicon Valley Bank
SVB was very popular – nearly 50 percent of all United States startups have some deposits in Silicon Valley Bank. In 2021 SVB saw a massive influx of deposits from around 61 billion at the end of 2019 to around 189 billion at the end of 2021. Now SVB wanted to make a larger profit from all of this cash that they were suddenly sitting on. A safe investment would be long-term bonds these are usually seen as safer than stocks and provide a steady return. SVB invested 80 billion dollars of their tech company deposits in long-term bonds and other securities. This arrangement works well even if some clients decided to withdraw sooner the bank can simply sell the bonds and get the liquidity necessary to pay back the depositor. But what happens when everyone wants to withdraw their money all at once? Well, SVB started selling bonds at a lost to catch up with liquidity, but it was not enough and the collapse happened.
Potential Consequences of a Banking Crisis
If a banking crisis were to occur in the US, it could have far-reaching consequences for the economy and society as a whole. One potential outcome is a sharp decrease in lending and credit availability, making it harder for businesses and individuals to access the financing they need to grow and thrive. This could in turn lead to widespread economic downturns, job losses, and even social unrest. Another potential consequence of a banking crisis is a loss of confidence in the financial system, which could lead to a run on banks and other financial institutions. This could further exacerbate the crisis and potentially cause widespread financial panic and instability.
Financial commentators have said that this is an inflationary move for a lot of regional banks who use the same style of banking as svb and saw worried depositors piling up outside to get their money out. The fed and U.S government had to do drastic moves to avoid bank runs and a cascade of bankruptcies. Nobody is a fan of government-assisted bailouts but this is a tough situation. As Simon Johnson, an economist at MIT, who previously served as the chief Economist of the IMF said “all choices are bad choices. You don’t want to extend this kind of bailout to people but if you aren’t doing that you face a run of really big and really hard to predict proportions.”
Steps to Address the Crisis
This is the largest banking failure since the financial crisis. If the fed’s creation of the bank term funding program isn’t as smooth as promised or takes too long the consequences for the companies around the us could be devastating. Even though I think the Federal Reserve does have some blame for the background macroeconomic situation they did need to do something further to this. If the Federal Reserve reverses course and starts cutting interest rates inflation could ramp up again causing even more havoc. They’re stuck between a rock and a hard place, raise rates – destroy the economy, cut rates – also destroy the economy. With Silicon Valley holding 50 percent of U.S VC backed startups as customers, 65 000 startups would be affected by the collapse even if the government does succeed in making each depositor whole. It’s a sad time for the tech sector as confidence has been shaken, the nightmare of being locked out of company cash, delays in paying staff and countless administration issues will leave a scar.
Despite these challenges, there are steps that can be taken to address the US banking crisis and mitigate its potential impact. One key approach is to increase oversight and regulation of the financial sector, ensuring that banks are operating in a safe and responsible manner and avoiding risky investments and lending practices. Additionally, policymakers and financial institutions can take steps to increase access to credit and financing for businesses and individuals, supporting economic growth and stability even in the face of challenging circumstances.
In summary, this is a story of rapidly changing market conditions, risk management failure and lobbying. This svb story is still unfolding we can only wait and see what the longer term impacts will be.
The US banking crisis is a complex and multifaceted issue, with implications for the global economy and society as a whole. While the situation is concerning, there are steps that can be taken to address the underlying problems and ensure a stable and prosperous financial system for the future. By working together and taking a proactive approach to managing risk and promoting economic growth, we can navigate these challenging times and emerge stronger and more resilient than ever before.