A Major Bank Failed. Here’s Why It’s Not 2008 Again
A Major Bank Failed. Here’s Why It’s Not 2008 Again
By Associated Press March 10, 2023, at 5:05 p.m.
The financial institution best known for its relationships with high-flying world technology startups and venture capital, Silicon Valley Bank, experienced one of the oldest problems in banking — a bank run — which led to its failure on Friday
NEW YORK (AP) — The financial institution best known for its relationships with high-flying world technology startups and venture capital, Silicon Valley Bank, experienced one of the oldest problems in banking — a bank run — which led to its failure on Friday.
Its downfall is the largest failure of a financial institution since Washington Mutual collapsed at the height of the financial crisis more than a decade ago. And it had immediate effects. Some startups that had ties to the bank scrambled to pay their workers, and feared they might have to pause projects or lay off or furlough employees until they could access their funds.
How did this happen? Here's what to know about why the bank failed, who was affected most, and what to know about how it may, and may not affect, the wider banking system in the U.S.
WHY DID SILICON VALLEY BANK FAIL?
Silicon Valley Bank was hit hard by the downturn in technology stocks over the past year as well as the Federal Reserve's aggressive plan to increase interest rates to combat inflation.
The bank bought billions of dollars worth of bonds over the past couple of years, using customers' deposits as a typical bank would normally operate. These investments are typically safe, but the value of those investments fell because they paid lower interest rates than what a comparable bond would pay if issued in today's higher interest rate environment.
Typically that's not an issue, because banks hold onto those for a long time — unless they have to sell them in an emergency.
But Silicon Valley's customers were largely startups and other tech-centric companies that started becoming more needy for cash over the past year. Venture capital funding was drying up, companies were not able to get additional rounds of funding for unprofitable businesses, and therefore had to tap their existing funds — often deposited with Silicon Valley Bank, which sat in the center of the tech startup universe.
So Silicon Valley customers started withdrawing their deposits. Initially that wasn't a huge issue, but the withdrawals started requiring the bank to start selling its own assets to meet customer withdrawal requests. Because Silicon Valley customers were largely businesses and the wealthy, they likely were more fearful of a bank failure since their deposits were over $250,000, which is the government-imposed limit on deposit insurance.
That required selling typically safe bonds at a loss, and those losses added up to the point that Silicon Valley Bank became effectively insolvent. The bank tried to raise additional capital through outside investors, but was unable to find them.
To continue reading, please go to the original article here: