The downfall of Silicon Valley Bank (SVB) has caused a stir within both financial and technological circles. As implied by SVB's name, the bank heavily concentrated on serving US technology startups. Amidst the COVID-19 pandemic, the bank experienced a significant surge in deposits due to the increased profits of tech companies providing entertainment and delivery services to individuals confined within their homes. In fact, its deposits tripled from 2019 to 2021.
Silicon Valley Bank (SVB) ranked as the sixteenth most significant banking institution in the United States, often described as a mid-tier lender as opposed to a top-tier one. As of December, SVB reported $209.0 billion in assets and $175.4 billion in total deposits, based on data from the Federal Deposit Insurance Corporation.
SVB directed a considerable portion of its funds into US government bonds, traditionally considered among the most secure investment vehicles. However, SVB's troubles started when the US Federal Reserve hiked up interest rates last year due to surging inflation, causing the value of those bonds to drop.
As the economic conditions of the tech sector became more challenging in the aftermath of the pandemic boom, many of SVB's clients began withdrawing their funds to stay afloat. Strapped for cash, SVB was forced to sell off its bonds at significant losses, raising concerns about the bank's financial well-being.
Within a mere 48 hours, anxious depositors withdrew sufficient funds to trigger the bank's downfall. SVB failed due to an amateurish error in its management of interest-rate risks: the bank invested short-term deposits into long-term bonds. The rise in interest rates resulted in a decline in the value of the bonds, eradicating the bank's equity. This mirrors the same pattern that led to the US Savings and Loan crisis in the 1980s. According to Campbell R. Harvey, a professor at Duke University's Fuqua School of Business, SVB's misfortunes illustrate the importance of diversifying a bank's assets. The lack of failure to diversify is being cited as a major reason for its collapse.
