Carén Oliver
Associate Editor
Loyola University Chicago School of Law, JD 2024
Founded in 1983, Silicon Valley Bank (SVB) is a midsize California-based lender that shook the foundation of the entire global financial system. Regulators closed SVB on March 10, making it the largest bank failure since the 2008 financial crisis and the second largest in U.S. history. While SVB offered various services from standard checking accounts to loans, it was primarily home to venture capitalists in the tech industry. Therefore, the majority of the corporate deposits were larger than the Federal Deposit Insurance Corporation’s (FDIC) $250,000 insurance limit, leaving over $150 billion in uninsured deposits at the end of 2022. The sudden collapse caused a frenzy leaving companies and investors vulnerable having already experienced mass layoffs in the tech industry.
Run on the bank and its effect
As the population remained confined to their homes during the COVID-19 pandemic, tech companies profited from providing entertainment and delivery services, triggering a surge in deposits. Therefore, SVB invested a lot of its funds into US government bonds, but when the US Federal Reserve began raising interest rates due to inflation, the bond’s value fell significantly. SVB’s clients began to withdraw their funds as the tech sector became constrained, forcing SBV to sell its bonds at a loss. Upon SVB announcing its $1.8 billion in asset sales and failing to secure investments, customers withdrew their funds in fear, causing the collapse. With $42 billion in deposit withdrawal requests, SVB was not able to raise the funds needed. The bank run on SVB compelled the Federal Deposit Insurance Corporation FDIC to take control of the bank’s assets.
The Justice Department and the Securities and Exchange Commission (SEC) launched an investigation into the SVB collapse, the separate inquiries are examining the actions of executives. Additionally, a class action was filed against SVB’s parent company alongside its C-suite alleging the bank did not disclose the risk that future interest increases would have on its banks. SVB is home to companies like Etsy, Roblox, and Roku. Some were left unsure if they could recover their cash on deposit in addition to the insecurities of not having enough operating capital causing delays in payments to Etsy sellers. The SVB failure has led companies like Viome which has been loyal to SVB since its inception to question the safety of the Us. Banking system. The Federal Reserve announced an emergency lending program to ensure banks can meet the needs of depositors, however, President Biden also stated that the government is not pursuing a taxpayer-funded bailout. His effort is significant by making an attempt to distinguish how this administration is different from the 2008 financial bailout. Despite the Obama-Biden Administration having successfully strengthened regulations through the Dodd-Frank Act, the Trump Administration lifted many of the requirements that led to the failure of SVB. However, Biden’s administration encourages the reinstatement of these safeguards to strengthen the banking system and protect consumers.
Aftermath reimagined
Upon the government bailout rejection, another attempt to find a buyer will be made via auction. However, given that it has been speculated that SVB was lenient with its lending practices it can be expected that the SEC will find SVB and its executives liable for cutting corners and will be penalized with significant fines. Elected officials will have to review what occurred and create stricter regulations to prevent this crisis from being repeated. The mismanagement of funds and the Chief Risk Officer vacancy should have been a red flag for potential havoc. It is one thing to have bad investments and the downward spiral of the economy but lack of internal oversight plays a role and must be held accountable. Following the fallout of SVB, Signature Bank in New York closed on March 12th along with a Switzerland bank, Credit Suisse on March 19th. The banking crisis should put all on notice and lead to a reevaluation of their practices to remain in compliance and avoid financial turmoil. While depository insurance did not cause the collapse, with more than 90% of SVB’s deposits being uninsured, analysts have suggested enhanced insurance coverage regulation could prevent a future crisis. However, this could increase deposit premium assessments, raising concerns about what the banking industry can afford. Having placed its focus on crypto, tech start-ups, and bond investments that are susceptible to interest rate hikes exposed the company to risk ultimately draining it of its capital.