The Collapse of Silicon Valley Bank: What Happens Now?

Written By: Oon Jie Rong (23-I1)

Designed By: Tan Shi Ying Marissa (23-O1)

The Fall

On March 8th, 2023, Silicon Valley Bank (SVB) announced that it would take a loss of 1.8 billion US dollars due to changes in the financial environment. 

On March 10th, 2023, SVB collapsed.

Within the span of 2 days, the failure of America’s 16th largest lender left the financial world shellshocked; the unceremonial death of SVB became the largest bank failure in the USA since the 2008 financial crisis. Now, as banks and governments are left to pick up the pieces, the most pertinent question is left unanswered: What happens now?

To answer this question, we need to understand what SVB was, what it did, and what fundamentally changed to lead to its collapse. Only then can we tell the ramifications of its collapse, and the future that is to come.

The First Domino

Silicon Valley Bank was set up in 1983 by a Wells Fargo executive and a Stanford University professor to cater to the needs of tech startups in the famed Silicon Valley of California. Acting as a lender of capital to the ambitions of entrepreneurs, SVB helped support the businesses of tech startups during the rise of technology companies during the now infamous Dotcom Bubble: A period of time in which many ventures into the startup business game were made by those with ideas of the future, thus leading directly to a massive increase in SVB’s stock as loans and deposits came in massive quantities.

When people, and more importantly investors, realised that a majority of these startups were never going to see any major profits, the Dotcom Bubble burst, sending the stock markets into a depression as panic gripped investors who wanted to see their money returned to them. SVB survived the fallout, although their stock prices were slashed by 50% after the whole ordeal.

However, the main precipitating factor which led to their ignominious death was an unlucky gamble.

With a massive growth in deposits from $74 billion in 2020 to $198 billion in early 2022, SVB decided to use its newfound wealth and hedged a bet on US government bonds: A relatively safe bet due to their stability in the face of rapid changes in the free market while paying a relatively consistent payout from the government. Although these bonds tend to be impacted very heavily by changes in interest rates, SVB decided to purchase these bonds in the expectation that interest rates were unlikely to change, given the lasting effects of the pandemic over the last three years.

As such, when the US Federal Reserve decided to raise interest rates sharply in response to the high pandemic-induced inflation in the economy, SVB faced massive losses as the value of US Government bonds decreases when interest rates increase. 

In response, SVB had to sell $21 billion in US government bonds, taking a $1.8 billion loss, while calling upon investors and stakeholders to raise another $2.25 billion dollars. This unfortunately had the inverse effect: Instead of raising funds to ride out a rough patch in profits, this shook investor confidence in SVB, leading to a rush of investors choosing to pull out their money from the bank.

This caused a phenomenon known as a bank run. Banks generally employ a concept of Fractional Reserve Banking, where the bank can loan out more money than they actually have physical capital, expanding the supply of capital in the economy directly. However, this meant that for the most part, one singular bank did not hold enough capital to repay all its investors at once. This was fine for the majority of time, in the ‘rational’ concept that not all investors in a bank would withdraw their money all at once.

But when they did, the bank would struggle to repay hundreds, if not thousands of angry investors clamouring to withdraw their money…

The Second Domino

Banks fundamentally operate on a system of human trust and confidence: One in which people trust a bank to be able to repay its interest rates on deposited capital and have those deposits be able to be withdrawn at a moment’s notice. On the other hand, it also trusts its customers who take loans, to be able to payout both the loan taken and its accumulated interest

When people lose trust in a bank, the end result is panic. 

Investors and shareholders will rush to withdraw their fortunes while the bank calls up its debtors to repay their loans, in a spiralling cycle of panic and mistrust. As the panic ensues, others will be swept up in the fervour, worrying that other banks which they have entrusted their money to will also suffer the same fate, causing another bank run, repeating over and over again as stock market values plummet, causing financial crises.

This was what fundamentally happened during both the Great Depression of the 1920s and the 2008 Financial Crisis, as banks failed left and right, wiping out hundreds of millions of savings in the span of hours. Even with massive scale government intervention to prevent the collapse of the economy, both events still severely weakened the economies of countries all over the world, and the livelihoods of millions, if not billions, were affected in the fallout.

As such, when SVB failed, investor trust plummeted. The initial bank run on SVB began to spread in scale, with both small and large banking institutions getting swept up in its fervour.

The Crash

As a knock on effect, Signature Bank also failed, acquired by the New York State Department of Financial Services, while other banks like First Republic Bank and Western Alliance saw a massive slash in share prices, with First Republic seeing a decrease around 52% to 67% while Western Alliance saw a 47% decrease in share prices. It also had a part to play in the failure of Credit Suisse, a major player in the financial world, eventually causing its acquisition by its rival, UBS, with major incentives by the Swiss authorities.

The failures of SVB and Signature Bank have been the second and third largest bank failures in the US respectively since 2008’s collapse of Washington Mutual.

The combination of the bank failures of SVB and Signature Bank with the earlier liquidation of Silvergate Bank, a cryptocurrency focused bank, have been labelled as the “2023 Global Banking Crisis”.

The Aftermath

As devastating as the collapse of SVB may have been, its most immediate ramifications have mostly been negated or lessened by the actions of governments and other financial institutions, having learnt lessons from the previous financial crisis of 2008. The Federal Deposit Insurance Corporation (FDIC), despite initially having only covered $250,000 worth of deposits for SVB and Signature Bank each, under the insistence of the US Government, the FDIC entered a purchase and assumption agreement for all deposits and loans held by both banks, ensuring that not a single depositor lost money in the collective collapses. 

However, the collapse of SVB and its knock-on effects have still left a detrimental impact on the global economy as a whole; with investor trust at an all time low, the worst impacts of the 2023 global banking crisis is still left to be seen. 

Technology and Hardware sectors have started experiencing waves of retrenchment, with those lucky enough to stay employed experiencing pay cuts in the meantime.

The fight against inflation, which had initially started after the pandemic, has also slowed, as governments and financial institutions await a more stable economic environment.

In an already volatile post-pandemic economy, it would be oversimplifying to state that the collapse of SVB was the only cause of a worsening economic landscape. Other events like the Russo-Ukrainian War, Tensions in the South China Sea and the recovery from a pandemic-stricken world have also contributed to the worsening state of the economy.

As of now, the final outcome of the entire debacle is uncertain: Will governments, companies and financial institutions come together to prevent another 2008? Or will we have to weather harsher and harsher economic circumstances in the times ahead?

One thing is certain however: The collapse of SVB is a sign of incoming storms.