The Collapse of Silicon Valley Bank: Lessons Learned and Risks Highlighted in the Current Financial System

Silicon Valley Bank is a technology-focused bank that was founded in the United States in 1983 to provide financial services to startups and other technology companies. The bank quickly became popular among the tech community and had grown to become one of the largest banks in the United States, with a focus on providing loans and other financial services to high-growth companies in the technology sector.

Silicon Valley Bank’s collapse was a culmination of multiple factors that ultimately led to its downfall. One of the key reasons was the bank’s heavy investment in long-term bonds and securities. While these are usually seen as safer investments than stocks, they became less attractive to investors as interest rates rose.

The issue with long-term bonds is that they pay a fixed interest rate, which means that when interest rates rise, the value of the bonds falls. This is because new bonds are issued with a higher interest rate, making the older bonds less attractive. As a result, the demand for these bonds declines, causing their prices to fall. This is exactly what happened to Silicon Valley Bank, which suffered unrealized losses of $15 billion by the end of .

However, the problems for Silicon Valley Bank started brewing way earlier, in late 2021, when inflation began to rise in the United States. Typically, when inflation rises, the Federal Reserve increases interest rates to counteract the inflation. But this time, they stood by and did nothing, telling everyone that inflation was transitory. This turned out to be completely wrong, and when the Fed realized their mistake, they had to raise interest rates very quickly to make up for lost time.

Meanwhile, at Silicon Valley Bank, their investing environment began to flip on its head as the interest rates rose. The newly issued bonds began to pay higher interest rates, making the older long-term bonds less attractive to investors. This resulted in a decline in demand, causing their prices to fall. Silicon Valley Bank still owned tens of billions worth of these long-term bonds, making them vulnerable to risk.

The bank was unable to cover the transactions when depositors began withdrawing their money, causing a panic. The Federal Deposit Insurance Corporation (FDIC) had to step in and shut down the bank.

The collapse of Silicon Valley Bank highlights the risks of the current financial system built on easy money and low-interest rates. While this may not be the start of another financial crisis, it has already affected the tech sector, and the longer-term impacts of this collapse are yet to be seen.

Another problem that contributed to the collapse of Silicon Valley Bank was the lack of proper risk management. The bank’s chief risk officer left in April and wasn’t replaced until January 2023. This meant that the bank had no one to oversee the process of rebalancing their portfolios to account for higher interest rates, precisely at the time when the downward feedback loop was accelerating. In other words, the bank was a plane without a pilot during a storm.

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Furthermore, the CAO of Silicon Valley Bank was the CFO of Lehman Brothers at the time of its crash, which raised concerns about the bank’s management and practices. The CEO, CFO, and CMO of the bank sold a combined 4.4 million dollars of company stock just weeks before the bank’s decline, and the bank’s employees received their annual bonuses only hours before the bank’s official crash. This raised questions about foreknowledge of the bank’s collapse.

The collapse of Silicon Valley Bank has already affected the tech sector, with tens of thousands of startups relying on the bank to pay their day-to-day operations, including staff. The collapse has left these startups struggling to access their funds, causing delays in paying staff, and countless administration issues. Confidence in the finance industry has been shaken, and U.S banks lost a combined $100 billion.

The Federal Reserve and the financial sectors of the US government have recognized the risks and have come up with a solution, including the creation of a bank term funding program to shore up liquidity for other at-risk banks. They are also allowing affected banks to sell their long-term bonds and securities to the Fed without a loss. However, many small banks may still go down, creating a cascading effect that could cause the rest of the economy to wobble.

Silicon Valley Bank’s collapse was a result of multiple factors, including heavy investment in long-term bonds, lack of proper risk management, and lobbying to remove regulations. These factors highlight the risks of the current financial system built on easy money and low-interest rates. The collapse has already affected the tech sector, and the longer-term impacts are yet to be seen. The Federal Reserve and the US government have come up with a solution, but it remains to be seen if it will be effective in preventing further bank failures.

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