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Financial Economics - The Failure of Silicon Valley Bank

Geoff Riley

11th March 2023

US financial regulators have shut down Silicon Valley Bank (SVB) and taken control of its customer deposits in the largest failure of a US bank since 2008. It is a good one to add to your notes on financial market failure.

This BBC news article provides some background on the root causes of the bank failure.

SVB had strong ties to the tech community and attracted huge deposits from a large number of tech start-ups. That was an advantage during the tech boom when tech firms were raising capital and looking for a home for their money. According to some reports, Silicon Valley Bank worked with nearly half of all venture-capital backed startups in the USA.

As money came in, SVB placed lots of it in the bond market which seems to have been the cause of their demise. The surge in inflation in the USA (and many other countries including the UK ) led to the US Federal Reserve raising policy interest rates as part of a significant tightening of monetary policy.

Higher interest rates then caused the market prices of bonds to fall - there is an inverse relationship between the two. That created sizeable losses in some of those bonds hitting Silicon Valley Bank hard. Some high-profile venture capitalists then instructed their portfolio companies to move money out of Silicon Valley Bank creating the conditions for a classic "bank run".

Silicon Valley Bank was rumoured to be in a sale process to protect its depositors. This added to investor nerves. When a bank runs into a liquidity crisis, it is often very hard to raise fresh funds. The Californian financial regulators have stepped it and now, it's the second biggest banking failure in US history. According to the Financial Times "This is the second-largest bank failure in US history after the 2008 collapse of Washington Mutual."

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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