Second biggest bank failure in US history after Washington Mutual collapse | Silicon Valley Bank
- ByStartupStory | March 11, 2023
In the second-largest bank failure in US history, Silicon Valley Bank, which provides services to high-tech startups and their investors, was closed down yesterday. With assets of $209 billion, SVB’s collapse was surpassed only by the failure of Washington Mutual at the beginning of the global financial crisis in 2008.
In less than 18 months, Silicon Valley Bank (SVB), a major bank servicing high-tech start-ups and their investors, has suffered the second-biggest bank failure in US history, with assets worth $209 billion. Despite having a market value of $44 billion a year and a half ago, the bank is now in the hands of receivers at the Federal Deposit Insurance Corporation (FDIC) after a failed attempt to raise $2.5 billion in capital.
Although the SVB CEO reassured customers and investors on Thursday about the bank’s financial health, it was of no use. The sixteenth largest bank in the US, SVB was deeply ingrained in Silicon Valley’s high-tech ecosystem and served about half of all new start-ups funded by venture capital investors.
An executive at a major venture capital fund remarked that SVB’s collapse led to the loss of its 40 years of business relationships in Silicon Valley within just 14 hours. The bank’s failure is attributed to the US Federal Reserve’s interest rate hikes aimed at curbing the rising wages of the working class amid the highest inflation rate in 40 years. SVB, which had accumulated significant cash holdings, invested in US Treasury bonds and mortgage-backed securities to find a secure location for its surplus funds, as money flowed into the high-tech industry due to the Fed’s prior ultra-easy monetary policies.
According to a Wall Street Journal report, SVB’s failure was unexpected given its investment in safe assets. The bank’s securities portfolio grew from $27 billion in Q1 2020 to approximately $121 billion at the end of 2021 due to the US Federal Reserve’s massive $4 trillion injection into the financial system following the market freeze during the onset of the COVID-19 pandemic.
According to the WSJ, the difference between the market value and book value of SVB’s “real estate secured mortgages” was $19.3 billion. This gap was larger than the total equity of First Republic. The total value of the bank’s financial assets was $26.9 billion less than what was shown on the balance sheet. A company spokesperson declined to comment on this divergence.
Despite the collapse of SVB, Treasury secretary Janet Yellen expressed “full confidence in the banking regulators,” saying that the banking system “remains resilient.” However, issues remain, and new regulations implemented after the 2008 crisis failed to prevent the market freeze of March 2020, for which regulators have yet to provide an explanation or solution. Additionally, the Fed’s injection of $4 trillion in response to the event has fueled unprecedented speculation in all financial markets, creating the conditions for a new crisis as interest rate hikes continue.
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