Just when you think the story of Silicon Valley couldn’t get any wilder, a major financial institution takes a nosedive. The 16th-largest commercial bank in America. What caused the Silicon Valley Bank to go belly-up? While there are many theories and opinions out there, it’s not easy to come up with a definitive answer—but that doesn’t mean it can’t be done.

The Background of the Silicon Valley Bank

Silicon Valley Bank (SVB) was founded in 1983 as a specialty lender catering to the technology, healthcare, and life science industries. It grew rapidly, investing in startups and venture capital funds to the tune of billions of dollars over the years. With more than $200 billion in assets, Silicon Valley Bank was the 16th-largest bank in the US as of last Friday. During the time when interest rates were almost zero, SVB invested billions in US government bonds.

Exploring the Financial Instability of the Bank

•   Despite its success, recent reports have raised concerns about the financial stability of the SVB. In 2020, the bank saw a sharp increase in loan losses due to the economic impact of the COVID-19 pandemic. This led to a decline in profitability and a decrease in the bank’s capital ratio.
•   In addition, there have been reports of high turnover among senior executives at the bank, which has raised questions about the bank’s leadership and management practices. Some analysts have also expressed concerns about the bank’s exposure to risky assets, such as cryptocurrencies and other speculative investments.
•   The SVB’s financial stability concerns have not gone unnoticed by regulators. In 2021, the Office of the Comptroller of Currency (OCC) and the Federal Reserve Bank of San Francisco began conducting a joint examination of the bank’s risk management practices.

Examining Poor Business Decisions That Contributed to the Collapse

•   High-Risk Lending: The bank specialized in lending to startups and emerging businesses, which are inherently high-risk ventures. However, the bank’s lending practices became even riskier as it began to lend to companies in the cryptocurrency and blockchain industries. These industries are known for their volatility and uncertainty, with many startups failing to generate any significant revenue or achieve profitability.
•   Poor Risk Management: The bank’s rapid expansion and focus on high-risk lending led to a lack of proper risk assessment and management. This resulted in the bank taking on more risk than it could handle, which ultimately led to its downfall.
•   Overreliance on a Single Industry: The Silicon Valley Bank’s overreliance on the technology industry was another factor that contributed to its collapse. While the bank’s focus on serving technology-focused businesses was initially successful, it became too heavily dependent on this single industry. When the COVID-19 pandemic hit and the technology industry experienced a slowdown, the Silicon Valley Bank was hit hard and struggled to recover.

Is a finance catastrophe just getting started?

In other banks, there are already some indications of stress. In early trade, the benchmark Stoxx Europe 600 Banks index, which monitors 42 significant EU and UK banks, dropped 5.6%. Most forecasts predict that rates in the US, UK, and Australia will increase before stabilizing. It’s making it the worst American bank failure since the global financial crisis.

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