$212 Billion Failure - Why Did the Silicon Valley Bank Collapse?

Silicon Valley Bank is the largest bank to fail since the 2008 financial crisis.

SVB branch in Santa Clara county, CA,Photo by(Images George Rex/Flickr)

How Big was Silicon Valley Bank?

New York Times reports, "Silicon Valley Bank provided banking services to nearly half the country’s venture capital-backed technology and life-science companies, according to its website, and to more than 2,500 venture capital firms." The Guardian estimates that the Silicon Valley Bank was a $212 billion Behemoth.

Why did the Bank Fail?

Silicon Valley Bank may have failed because of any one of a number of reasons. Or possibly it could have failed because of all of them. Lets examine some of them:

First, the bank invested in long-term debt, such as Treasury bonds, but did not anticipate the impact of rising interest rates on its investments. As a result, when the Federal Reserve started raising interest rates to combat inflation, the once-safe investments looked less attractive.

Second, the bank was also heavily concentrated in the tech industry, and as start-up funding declined, clients began to withdraw their funds. In addition, the bank had a significant number of uninsured depositors who tended to withdraw their money during times of turbulence. To meet customer demands for withdrawals, the bank had to sell some of its investments at a steep discount. This move resulted in a bank run, as start-ups rushed to withdraw their funds because they lost confidence in the bank.

The bank's failure is the largest since the 2008 financial crisis, and some experts suggest that the Dodd-Frank financial-regulatory package, which was intended to prevent such collapses, could have helped the bank better handle its interest rate risks had it not been rolled back.

Risk Management

The Guardian reports that the bank didn't have a Chief Risk Officer (CRO) for a portion of 2022. The Federal Reserve is investigating this. The previous CRO stopped performing the function in April and a new CRO was appointed in December.

Reed Kathrein, a lawyer who specialises in shareholder lawsuits said,

“It means perhaps management was hiding something or didn’t want to disclose something, or had disagreements over the risks it was taking,”

What are your thoughts?

What are your thoughts about why the bank collapsed. Was it greed? Or perhaps it was mismanagement? Do you think the Bank had something to hide or was it just bad luck? I'd love to know your thoughts.

Please let me know what you think in the comments below.