Silicon Valley Bank Fails: Second Largest Bank Failure

The second and third-largest bank failures in the United States raise doubts about the effectiveness of current banking regulations and management.

Security guards escort visitors into Silicon Valley Bank’s headquarters in Santa Clara, California (Credit: AP News).

Silicon Valley Bank and Signature bank’s recent failures mark some of the largest bank failures, second and third only to the 2008 Washington Mutual Bank failure, prompting doubts about whether current banking rules, risk mismanagement, and a myriad of other vulnerabilities factored into the collapse.

On March 10, 2023, Silicon Valley Bank, the 16th largest bank in the nation, failed. Depositors were guaranteed up to $250,000 in their accounts by the Federal Deposit Insurance Corporation (FDIC), though many companies had accounts containing well over this threshold. As a result, popular companies such as Roblox and Etsy, which both had millions deposited in Silicon Valley Bank, were affected.

Signature Bank depositors panicked during the aftermath of Silicon Valley Bank’s sudden failure, rushing to withdraw over $10 billion in deposits. Unable to keep up with the bank run, Signature Bank failed and was taken over by the FDIC.

Many factors contributed to the failure of Silicon Valley Bank, such as its management of funds.

Silicon Valley Bank was an establishment bank, providing loan services to startup businesses. These loans to business paid off, and large sums of money were deposited into the bank by companies that required investments of millions of dollars for functions such as operations and employee wages.

With these large amounts of money, Silicon Valley Bank invested in government bonds, a loan to the government for a certain period of time. After that period of time, the government pays back the loan, along with interest. Though government bonds are considered an extremely safe investment, they don’t return a lot of profit. However, the longer the loan period, the more interest and profit is gained.

Silicon Valley Bank invested the majority of its funds in 10-year government bonds, a good investment strategy at the time. A part of the depositors’ money was kept to provide money withdrawn by depositors.

However, once interest rates began rising, the value of the 10-year bonds fell. At the same time, setbacks in businesses, especially in the technology sector, forced many to withdraw large amounts of money.

These events combined led to the necessity for Silicon Valley Bank to raise more capital to keep up with depositors’ demands. With the majority of its funds locked in the 10-year bonds, Silicon Valley Bank was forced to sell these government bonds on the secondary market at a significant loss.

Word rapidly spread on social media that Silicon Valley Bank lost over $160 billion dollars, and depositors rushed to withdraw their money to avoid risk of losing it.

“Information travels quickly through social media so the panic about the bank could travel far more rapidly,” sophomore Danielle Gardner said. “If I was a depositor at SVB and heard about its alleged issues, I would feel concerned about my money.”

“Social media contributed to the problem,” sophomore Ella Shamash said. “The information about the bank spread quickly, and when one person says something, many others will follow.”

People wait in line outside a Silicon Valley Bank office to attempt to collect their money following the bank’s failure (Credit: NPR).

However, since banks only hold a portion of their capital in cash for withdrawals, Silicon Valley Bank was unable to keep up with depositors’ demands, the withdrawals snowballing into a bank run.

“I would have done the same as all the depositors,” freshman Katelyn Ho commented.

The bank run culminated with the FDIC’s takeover of Silicon Valley Bank. Depositors were guaranteed the $250,000 per deposit promised by the FDIC, though 94% of the deposits in the bank were above this threshold and therefore uninsured.

Though the FDIC assured depositors that the remainder of this sum would be returned once Silicon Valley Bank’s assets were liquidated and sold, it is unknown how long this process may take and when startup businesses would receive the millions of dollars deposited.

Another factor that played a role in the failure was bank regulations. During the Obama-Biden administration, more strict requirements and regulations were imposed on banks to prevent failures like the Silicon Valley Bank failure, though a 2018 law passed during the Trump administration rolled back some of these regulations.

One particular law required that banks with over $50 billion in assets would be stress-tested and required to maintain a certain level of capital, reasoning that mid-sized banks would not present systemic risks. However, this restriction was eased to $250 billion in 2018.

Since Silicon Valley Bank did not reach this $250 billion threshold, it was not as closely regulated, and red flags in its management of funds and capital were not noticed until its failure.

“More bank regulation is needed to reduce the likelihood of this happening again,” Danielle Gardner said.

The largest bank failures in chronological order, the Silicon Valley Bank failure on the far right (Credit: New York Times).