In March 2023, a bank called Silicon Valley Bank was closed by the government in California because it lost a lot of money on its investments and many customers took out their money. Another bank called First Citizens Bank bought all the money and loans from Silicon Valley Bank. This has happened to other banks before, but it was a big deal because it was the biggest bank to fail since 2008, which was during a bad financial time in the U.S.
Overview of Silicon Valley Bank
Silicon Valley Bank is a bank that helps businesses. It’s a part of a bigger company called SVB Financial Group. It’s one of the biggest banks in the US and has a lot of money, about $209 billion in December 2022. Silicon Valley Bank helps all kinds of businesses, but it’s really famous for helping new businesses that are just starting out. In fact, 44% of the new companies that became public in 2022 were clients of Silicon Valley Bank.
Poker Game Sparks Silicon Valley Bank’s Inception
Bill Biggerstaff and Robert Medearis conceived the notion of establishing Silicon Valley Bank while playing poker. The first branch of the bank was launched in San Jose, California in 1983 by the duo and the CEO, Robert Smith. The bank was listed publicly in 1988 and subsequently relocated to Menlo Park in 1989 to strengthen its foothold in the venture capital industry.
Over time, Silicon Valley Bank expanded to become among the largest commercial banks in the United States. Its growth accelerated significantly during and after the pandemic, from 2019 to 2022, and it increased in size almost threefold. This growth propelled the bank up the rankings from the 34th largest to the 16th largest bank in the country.
What led to the downfall of Silicon Valley Bank?
Between 2019 and 2022, Silicon Valley Bank experienced tremendous growth, resulting in a significant accumulation of deposits and assets. While a small portion of the deposits were kept in cash, the majority was invested in Treasury bonds and other long-term debts that typically offer low returns and low risk.
However, the Federal Reserve’s response to high inflation led to an increase in interest rates, making Silicon Valley Bank’s bonds riskier investments. As a result, the value of the bank’s bonds decreased as investors opted to purchase bonds at higher interest rates.
Furthermore, during this time, some of Silicon Valley Bank’s customers, primarily from the technology sector, experienced financial difficulties, leading many to withdraw their funds. In order to meet the large withdrawal requests, the bank opted to sell some of its investments, but these sales were made at a loss.
Ultimately, Silicon Valley Bank suffered a loss of $1.8 billion as a result of these events, which marked the beginning of the end for the bank.
Silicon Valley Bank’s failure has been the subject of debate, with some suggesting that it began with the repeal of the Dodd-Frank Act, a significant banking regulation implemented in response to the 2008 financial crisis. The Dodd-Frank Act mandated additional oversight and rules for banks with more than $50 billion in assets, a provision that would have applied to Silicon Valley Bank.
However, in 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act was signed into law by President Donald Trump, changing the requirement significantly. The threshold for banks subject to additional oversight was increased from $50 billion to $250 billion, exempting Silicon Valley Bank from the extra regulations despite being the 16th largest bank in the country.
The change in the threshold meant that Silicon Valley Bank didn’t have enough assets to be subject to the additional oversight and regulations, which would have resulted if the Dodd-Frank Act had remained unchanged. As a result, some believe that if the threshold had not been increased, regulators would have more closely monitored Silicon Valley Bank, potentially preventing its failure.