Back to 2008?: The Collapse of Silicon Valley Bank and its Impact
The Silicon Valley Bank sudden collapse had shocked many and led to the collapse of other financial firms at risk. This collapse marks the first major financial meltdown post-2008. Will the crisis led to a global financial crisis? In this essay, the writer argued the opposite, however there are some strings attached.
On March 10th, Silicon Valley Bank with assets comprising of $212 billion in value, collapsed. The Federal Depositors Insurance Corporation–U.S main regulatory agency–has announced that the bank has failed and will cover the depositors up to a certain limit. In a dramatic move, the share price of SVB has plunged 70% below the market prices morning after the announcement, then the halt was called. Following the collapse of SVB, Signature Bank was also closed by state regulators to prevent further risk in the financial system. As this essay is written, the financial meltdown caused by SVB has taken its third fatality, which is Credit Suisse, the oldest financial institution in Switzerland. Some experts believe it is one of the worst financial meltdowns after the 2008 Financial Crisis. This essay will explore the implications of the SVB and the sudden collapse of other financial firms and what the collapse tells us.
Silicon Valley Bank is an FDIC-insured bank which means that the limit of $250,000 in the depository account can be recovered. Every account holder will be guaranteed exactly the amount from the FDIC’s Deposit Insurance Fund. After that, the bank will gradually sell off illiquid assets and pay back the depositors’ money. But the problem occurred that 93% of the SVB accounts are uninsured, or over the limit. This is mainly because most of the SVB’s depositors and clients are startups companies, small-medium enterprises, and venture capitalists–but mainly, the start-up companies (Tobin & Miller, 2023). Since its founding, the firm has been focusing on California’s nascent and growing tech industries. Just last year alone, SVB was serving nearly half of U.S venture-backed technology and healthcare companies (Allyn, 2023).
The simplest explanation of what is happening is what economists may call a bank run. Bank runs occurred when a large number of customers suddenly withdrew their funds from the financial institutions. This is happening when the customers believe that the bank may fail or become insolvent in the near future. Banks borrow from their customers in terms of savings accounts with low interest and then lend to its debtors on higher interests. Generally, this is also how banks generate a profit. But on the other hand, it is a risky business for the reason that the investments and lending banks are making with higher interest are usually highly illiquid.
This became a situation when a bank that has highly illiquid assets are relying on liquid assets to pay its depositors back. This is exactly what happened with SVB when more than 50 percent of their assets are held as a long term bonds in the U.S Treasury (FDIC, 2023). The circumstance above is called a maturity mismatch. This mismatch between the assets and liquidity left banks more vulnerable to a bank run. Reflecting upon past crises, such as the The Global Financial Crisis of 2008 and The Great Depression of 1929, a bank run always has been a precondition for a downturn of the economy.
Will the SVB collapse resemble the 2008 crisis, thus having a severe effect on the rest of the global economy? To answer the questions, we could examine the difference between the recent collapse of some financial firms in the US with The 2008 Global Financial Crisis.
First, we should examine the cause of the crisis, that is the underlying conditions. It is important to note that for the cases of 2008, the matter is still hotly debated among economists and economic historians. But for the purposes of comparison, we can point to the collapse of the housing bubble a year earlier. The housing bubble across America was a result of a long period of low interest regime by The Fed. This bubble contributes to banks and financial firms alike hopping onto the housing market train–especially the mortgage market. Eventually, banks not only accumulate good loans, but also junk loans with higher risks of default–called subprime mortgages. When housing bubbles collapse, borrowers default, causing banks to lose their investments (Baily et al., 2011). This has some similarities with the SVB collapse, that is a tech boom happened a year earlier. But, there is no direct correlation between the tech bust and SVB’s collapse. Most of the assets held are U.S treasury bonds which are relatively safe and are guaranteed by the federal government.
Secondly, we can also look at the government and central banks response to the crisis. As Stiglitz (2010) note, in the events leading to the crisis of 2008, there are no coherent and concrete strategies from the central banks and federal government to save the economies. The Bush and Obama administrations created the notion of “too big to fail” to determine which banks need bailout from the taxpayer. This is to avoid political pressures on bailing out large banking corporations. As we can expect, the market reacts negatively and the collapse becomes contagionary on the rest of the economy. In the case of SVB’s collapse the federal government and central banks have assertively intervened to save the depositors, not shareholders and bondholders. This marks the return of more active government interventions to the market.
In short, we can imply that today’s banking collapse and 2008 are much more different. The U.S and global market has far stricter banking regulations nowadays than in the time of the 2008 crisis. The Dodd-Frank Act, a regulation that passed in 2010 aimed to ensure that a bank has their risk under control. What this regulation does is they require a certain number of capital requirements for the banks to hold. The stricter banking regulation implemented after Basel III that sets standards on regulating the liquidity requirements, stress testing and capital adequacy ratio also contribute to downgrading the effects of global contagion.
Furthermore, the central bank nowadays had much more of a role in terms of intervening on behalf of the banks and guaranteeing the depositors. For the case of the recent U.S banking collapse, the Biden Administration has immediately found a way to avoid political pressures of using taxpayers money while at the same time guaranteeing depositor’s money. The quick action of central banks, regulators and government agencies are important in managing the risk of contagion for the real economies and to ensure financial stabilities amidst bank run. For the reasons mentioned above, the immediate contagion and thus global financial meltdown is less likely to occur.
However, the recent banking collapse in the U.S reveals an underlying condition that is alarming for the global market: an increasing interest rate. Inflation rates especially among developing countries are surging to the highest in 40 years. For central banks across the world, these desperate circumstances call for desperate measures. The Fed and other central banks, especially among developed countries has increase effective interest rates as a counter inflationary measures. An increasing interest rate, combined with high levels of debt could be a problem for banks and other depositionary firms. The risk possessed by increasing rate could also be an economic downturn. The global recession is likely, but that is a risk that the policymakers understand and took in order to combat rising inflation.
Athar Hadiyan is a part of Research and Development Division in ISAFIS and a second year undergraduate student in International Relations with a major in International Political Economy and Development. Athar has a particular interest in discussing politics, history, economy, and philosophy.. For more of his ideas and opinions you could reach Athar Hadiyan on substack and @RadioFreeAthar on Twitter.
Bibliography
Allyn, B. (2023, March 11). Silicon Valley Bank failure could wipe out “a whole generation of startups.” NPR. https://www.npr.org/2023/03/11/1162805718/silicon-valley-bank-failure-startups
Baily, M. N., Litan, R. E., & Johnson, M. S. (2011). The Origins of the Financial Crisis. In Lessons from the Financial Crisis (pp. 77–85). https://doi.org/10.1002/9781118266588.ch11
FDIC. (2023). Financial & Regulatory Reporting — Assets, Liabilities and Capital — SVB — FDIC Cert #24735. In https://banks.data.fdic.gov/bankfind-suite/FinancialReporting/details/24735.
FRED. (2019). Effective Federal Funds Rate. Stlouisfed.org. https://fred.stlouisfed.org/series/FEDFUNDS
Rennison, J. (2023, March 13). Bank Shares Tumble in Wake of Failures. The New York Times. https://www.nytimes.com/live/2023/03/13/business/silicon-valley-bank?smid=url-share#barney-frank-a-co-author-of-key-banking-legislation-was-on-the-board-of-one-of-the-failed-banks
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Tobin, M., & Miller, H. (2023, March 10). How Silicon Valley Bank Served the Tech Industry and Beyond. Bloomberg.com. https://www.bloomberg.com/news/articles/2023-03-10/silicon-valley-bank-the-investor-lender-networker-of-startups?sref=R8NfLgwS
