The Collapse of Silicon Valley Bank & its Consequences

In the past week a few banks have failed, however nothing as large as the major bank for tech startups, the California based Silicon Valley Bank. Everybody has heard about the bank closure and the failed attempts from customers to withdraw their no longer available funds. But how does such a massive bank collapse and close in such a short amount of time? Several years ago, the Silicon Valley Bank bought fixed rate treasury bonds paying an interest of 1.5% annually. However, with the current recession we are in and interest rates pushing near 7%, SVB (Silicon Valley Bank) has been holding a losing investment for quite some time. Recently, reports released that the CEO sold 11% of the company’s stock along with the CFO selling 32% and the CMO selling 28% of their stocks. Because of the bad investment in the treasury bonds and the massive stock sales, investors started warning people about these transactions, and on Thursday of March 9th, over $42 billion was attempted to be withdrawn from the bank causing a “run on the bank” which is when massive amounts of withdrawals go through that the bank cannot afford to give to their customers forcing the bank to collapse.

So, what happens with the $200 billion bank? As per FDIC regulations, they insure up to $250,000 per person, per account. However, as SVB caters to businesses and startups, over 90% of the accounts are over the FDIC insured limit, meaning most of the money in SVB is uninsured. On Sunday, March 12th, officially closed the bank and announced that all customers of SVB will be made whole of their deposits. Luckily for Americans they are pulling money out of a fund that banks already invest into for events like this, so no taxpayer money has to go into it. They also announced on Sunday that the bank will NOT be bailed out, as it is their own fault for the poor investments and shady to say the least, insider selling.

What does this all mean for the economy? Well, it’s a shame for small businesses and Americans as a whole. Smaller or mid-size banks can no longer be trusted that their clients funds are safe, and already we are seeing people take out of their bank accounts and put their money into banks like J.P. Morgan or Goldman Sachs that are considered “too big to fail.” While smaller banks and the FDIC have said that the risk isn’t as big as we think for smaller banks, the damage is already done. Unfortunately, with the closure of SVB, as well as several other banks this week, retail investors are more fearful than ever. So as your average Americans are scared to invest their money, more and more capital stands still, which we all know is bad for the economy. Unfortunately, events like this don’t generally have a happy ending and we can expect interest rates to possibly increase, but at the very least, stay high for far longer than anyone could have hoped. Historically, recessions have been devastating, and this one will be no exception.