The Failure of Silicon Valley Bank: What Its Sudden Collapse Means to the Banking Sector and the Economy
Silicon Valley Bank headquarters in Santa Clara, California, March 10, 2023. US regulators have shut down Silicon Valley Bank (SVB) amid its sudden collapse, the Federal Deposit Insurance Corporation (FDIC) announced in a statement on Friday. Photo: Tayfun Coskun/Anadolu Agency via Getty Images
The failure of Silicon Valley Bank (SVB) has touched off an outpouring of global anxiety about the entire banking system.
The big question for bewildered observers in Canada and around the world is how the demise of a relatively obscure U.S. bank that caters mostly to the high-tech industry managed to spook investors about the stability of the global banking system.
Is this an overblown social media-fuelled crisis or has exposed cracks in the financial system, similar to what we experienced in the bank failures of 2008?
Let’s see what the key players and respected financial analysts have to say about what the collapse of SVB and means to the larger economic picture.
What just happened?
On March 8, SVB sent a letter to its clients advising that it was seeking to raise US$2.25 billion to improve its balance sheets. It assured investors that the bank’s overall financial health was “quite sound” and that it was “well positioned to serve our clients through market volatility, with a high-quality, liquid balance sheet and strong capital ratios.”
The letter, which was supposed to calm clients, had the opposite effect. Nervous customers — including Silicon Valley bigwigs and venture companies — posted their fears on social media sparking panic and touching off what some are calling a “Twitter-led bank run.” This fear prompted investors to withdraw their assets from SVB — a staggering US$42 billion in one day alone — which ultimately caused the bank to fail.
On March 22, the Federal Deposit Insurance Corporation stepped in and sezied control of the bank. The panic, however, began spilling over to other similarly structured regional U.S. banks as investors began panic-selling their stocks in Republic, Signature Bank and Western Alliance.
How big was the fail?
Before its meltdown, SVB was reported to hold US$212 billion in assets, making it the 16th-largest bank in the U.S. According to Forbes, SVB becomes the “second-largest bank failure in U.S. history, second only to Washington Mutual, whose 2008 failure came as the bank had roughly [US]$300 billion in assets.”
What caused it to fail?
Although the full story hasn’t been written, the early consensus among observers is that SVB was generally well run and did not bring about its downfall by speculating in risky investments. Instead, they’re blaming the failure on changing financial conditions: massive government spending prompting inflation and resulting in higher interest rates.
While some point to the economic factors as the cause of the failure, suggesting that it was “hit hard by the downturn in technology stocks over the past year,” others criticize central banks — including the U.S. Federal Reserve — for implementing “aggressive plans to increase interest rates to combat inflation.” As Paul Ashworth, chief North American economist at Capital Economics, writes: “When central banks throw their rate hammer around with abandon, things tend to break — if not in the real economy, then in the financial system.”
What was the ripple effect?
The failure of SVB sent shock waves reverberating throughout social media, with many worrying if we were in for a repeat of 2008. Because of this sudden “crisis of confidence” investors punished the banking sector by selling stocks in Canada and worldwide. “Markets are wild. We move from the problems of American banks to those of European banks,” said Carlo Franchini, head of institutional clients at Banca Ifigest in Milan, during the frenzied trading session on Wednesday.
How extensive will the fallout be?
Some analysts feel the risk of continued contagion is minimal. “This isn’t 2008. This is 2023,” says Kevin Burkett, portfolio manager at Victoria-based Burkett Asset Management.
Others, however, are less sanguine, worrying that the collapse “will have longer-term impacts beyond the next few weeks and months,” especially on the tech industry which has been a key driver of the global economy for the last 30 years.
U.S. President Joe Biden sounded a reassuring tone yesterday, telling the American public: “… our banking system is safe. Your deposits are safe.” Experts are commending his administration for speedily restoring confidence in the banking system by immediately bailing out SVB investors. “Unlike in 2008, the government is getting ahead of the problem rather than trying to clean up afterward, wrote Brad McMillan, chief investment officer for Commonwealth Financial Network .
In Canada, where SVB had only one branch, the office of Deputy Prime Minister and Finance Minister Chrystia Freeland released a statement also calming fears “The government wants to assure Canadians our financial institutions are stable and resilient. Significant structural and regulatory safeguards are already in place in Canada.”