Silicon Valley Bank Facing Major Collapse

    Silicon Valley Bank (SVB) in Santa Clara, Calif. became the largest bank to collapse since the 2008 financial crisis on Monday, March 10.

    SVB is the 16th largest bank in the United States. The bank grew rapidly during the pandemic and deposits were largely from technology start-ups.

    “The broad understanding of a bank is that you deposit money into them, but they only keep a fraction of your deposit physically at the bank,” said economics professor Dr. Nicholas Pusateri.

    After a person deposits their money into a bank, they trust the bank and the dependence on federal deposit insurance to keep their money safe from risks.

    “SVB took these deposits and put them in long-term assets while interest rates were low,” said economics professor and bank expert Dr. Lucjan Orlowski.

    These long-term assets resulted in the money the bank invested being stuck in their investments. In the past 12 months, these interest rates have been rising from what once was near zero to almost five percent. As these rates rose, the value of the assets invested declined.

    “There are several factors that contributed to the SVB collapse,” said Orlowski. “The lack of proper interest rate risk management was one of them.”

    As the depositors began to take out their money, SVB had to liquidate their assets to meet the demand. Because they invested long term, they generated loss which resulted in SVB coming up with insufficient amounts to meet the requested withdrawals.

    “The federal government essentially had to step in and make sure that people were going to get their money,” said junior Julianna Aligo. “They had to replace the money SVB lost at a massive cost.”

    SVB previously had a $250,000 federal deposit insurance with the Federal Deposit Insurance Corporation (FDIC). After the collapse, the federal government protected all the bank’s deposits, even those exceeding $250,000.

    “One side of me looks at a bank like any other business. When I think of banks in those terms then I say the government should let the banks fail,” said government professor Dr. Gary Rose. “There is also the side of me that realizes how the failure of a bank can affect financial institutions and the economy in a ripple effect that can be serious. With that said, I can justify the government bailing out mega banks.”

    Many depositors were start-up companies that took out loans from SVB to support their launch, a great deal of which were within the tech industry.

    “The collapse of these banks may result in limited funding sources for the tech sector,” said Orlowski. “Ultimately, it may lead to the sector consolidation through mergers and acquisitions by larger, well-capitalized firms, as a partial solution to the funding problems.”

    President Joe Biden said that the American people can still have confidence in their bank deposits. The federal government is working to review the supervision of SVB to understand what went wrong. They plan to release this information on May 1.

    “We briefly talked about it in class, I wish we learned more about it so we all could understand it better,” said junior Marissa LaValle. “As students, we use bank accounts almost every day, it is important to be knowledgeable about something in our life that could potentially have large risks.”

    There is speculation that it may be time to raise deposit insurance thresholds, so the U.S. does not end up in another financial crisis. Lawmakers are calling for legislation to create stricter rules on regional banks, like those that tightened restrictions after the 2008 crisis.

    “This is not like the financial crisis of 2008,” said Pusateri. “We do not need to worry that this will become as large scale, we’re going to be fine.”

    The Associated Press contributed to this article.

About the author

Staff Writer

Leave a Reply