Rise and fall of Silicon Valley Bank: what went wrong?

On March 10, 2023, the United States (US) witnessed the second-largest bank failure in its history with Silicon Valley Bank. After the 2007-2008 Great Economic Depression, this is the first time in America that this kind of economic crisis has occurred. This created a global impact and Bangladesh is no different from this. People had withdrawn about USD 42 million in just one day out of fear that the bank would collapse. This was sparked by a letter that Silicon Valley Bank's Chief Executive Officer, Greg Becker, had sent to shareholders on March 9, 2023. The bank had suffered a $1.8 billion loss on the sale of US treasuries and mortgage-backed securities and outlined a plan to raise $2.25 billion of capital to shore up its finances. As a result, customers immediately rushed to withdraw their money, including many of the venture-capital firms the bank had cultivated over decades.

Silicon Valley Bank is a dreamland for startups established in 1983. Before this disastrous event, it was the 16th largest commercial bank among 4,157 commercial banks. This bank used to provide banking services to venture-backed tech firms and life-science companies. It has operations in different countries like Canada, China, Denmark, Germany etc. The bank is the main attraction for Tech startups established in Silicon Valley. Now, think the other way around. During the Covid pandemic, the tech sector had a massive boom, whether from conducting classes on Zoom meetings or different tools of online-based services. This created a huge bang in the tech sector, and the direct beneficiary was the Silicon Valley Bank, as all the profit money was reserved here. The transformation was significant as the bank's assets were $71 billion USD in 2019 and jumped three times to $220 billion USD in March 2022. If we talk about bank savings during this period, it turned to $198 billion USD from $62 billion USD.

Now the question arises: being such a profitable bank, why did it collapse? To look into this, let's get a flashback to the years 2007-2009 when the whole world was experiencing a terrible financial crisis. At that time, the biggest economic countries adopted some aggressive economic policies. For example, America, Japan, and the European Union had decided to implement a zero-interest rate policy to save their economy. The Silicon Valley Bank bought bonds at this minimal interest rate from the US government.  ZIRP (zero interest rate policy) was unchangeable. All went well until the US government recently increased its interest rates, which resulted in 1 USD = 1 EURO. As a result, the new bond prices became very high, and the previous bond prices declined significantly. Silicon Valley Bank was not able to cope up with the new bond price. Their portfolio yielded an average 1.79 per cent return last week, which was far below the 10-year treasury yield of around 3.9 per cent.

Tech startup companies not only had reserves in Silicon Valley Bank but also had taken loans from other places, which they had to pay with high-interest rates from their savings. Now, Silicon Valley Bank had to sell all the bonds at losses to repay the tech-startups, which they couldn't do. Ultimately, it failed. In the USA, the FDIC assures that per person, per bank or per ownership, $250,000 USD can be kept in a bank, and even if the bank collapses, they will return this amount.  But if someone keeps more than that, they will not get back anything more than this limit. Due to this panic, people started to withdraw their money out of fear of a collapse, and eventually, the collapse happened due to the withdrawal. This can be referred to as the fear cycle. Until the end of 2022, 94 per cent of the deposits in Silicon Valley Bank were uninsured.

The whole banking system was affected by it as First Republic Bank (FRC) and PACWEST BANCORP (PACW) both faced drops as their shares plunged 65 per cent and 52 per cent respectively. As a result, on Monday, their trading was temporarily halted. In Europe, the benchmark Stoxx Europe 600 Banks Index, which tracks about 42 big European and UK banks, fell by 5.6 per cent in morning trade. Not only Silicon Valley Bank, but at the end of 2022, there were US$ 620 billion unrealised losses in the USA, which means those assets whose prices have declined were not  sold as that would be bad for the economy in general.

This whole scenario has no direct effect on Bangladesh, but there is a lot to learn. The ultimate solution comes from liquidation, which means if a bank goes through a bad crisis like this, then all the activities should be closed for all the branches, sell all their assets, and return the money to the investors. On the other hand, in Bangladesh, there is an attempt to save these types of banks instead of closing them off. There is a systematic risk to rescue these types of fragile banks, and thus, the USA doesn't allow saving them and suppresses them by punishing. Many economists in Bangladesh think we should follow this strategy to tackle this kind of situation.

Sumaiya Kabir is an undergraduate student of Economics at East West University,

Dhaka, Bangladesh

sumaiyakabir54@gmail.com