The Collapse of the Silicon Valley Bank

Until Friday 10th March 2023, Silicon Valley Bank (SVB) was the 16th largest bank in the US, with its value worth more than $200 billion. The SVB was created in 1983 and it became renowned for its technological prowess and astute decisionmaking They provided financial support for companies in the technology industry globally up till its downfall owing to a sequence of hapless investment decisions

Throughout the pandemic era, demand for electronic devices and digital services has increased rapidly as people spent most of their time using electronic devices at home due to the lockdown. For instance, Apple’s stock prices nearly doubled in 2020 and they had a 20% revenue growth (Dilek, 2021) This growth in demand for goods in the technology industry has allowed the establishment of numerous startup companies in early 2020 after the release of the COVID-19 virus

The majority of tech startup companies utilised SVB to keep their money for any payrolls or other expenditures regarding their business SVB took this chance and used the influx of deposits for investment. When it made significant investments in long-term US government bonds, especially those backed by mortgages, was the remark of the beginning of its collapse.

Back in September 2022, the Federal Reserve rapidly raised the interest rates due to the soaring inflation rate. (Smith & Duguid, 2022) This is known as the contractionary monetary policy, which is implemented by the central bank to lower inflation by increasing the interest rate and decreasing the money supply in the short term. Increasing interest rates will encourage people to save their money due to higher returns of savings and will prevent them from purchasing goods and services, which will result in lower price levels. The elevated interest rates have caused a substantial loss in SVB’s bond portfolio since bonds have an inverse relationship with interest rates. This is because the investors will be discouraged by the lower interest rate of the bond, which will outcome a decline in its price. (Lioudis,

2023)

Furthermore, banks usually have a portion of their assets as cash for several reasons: transaction motive, precautionary motive and speculative motive

In the book “The General Theory of Employment, Interest and Money” by John Maynard Keynes, he discusses these 3 motives in Chapter 13, the general theory of the rate of interest Transaction motive is the required cash for any business to run its day-to-day operations such as wages and rent. A precautionary motive is an action of holding cash to cope with any unexpected affairs that compel cash outlay. Lastly, the speculative motive is a strategy usually used by investors or traders, who are seeking investment opportunities that may occur in the future (Keynes, 2002)

SVB’s problem slowly commenced when they made atrocious investment decisions and it was set off after their announcement of a $1 75 billion capital raising to replenish their loss on a bond portfolio This enabled customers to be knowledgeable of the financial issues SVB was going through, precipitating them to withdraw their money.

Unfortunately, the majority of SVB clients owned large accounts unlike retail banks for households, making the bank run even more rapidly

SVB did not have the ability to embrace this as it could not hold these bonds for years until it got its capital back. As the coronavirus dominated the world, the economy has been on a decline, inducing uncertainty (Jackson et al , 2021) This caused the majority of the customers to withdraw their deposits. SVB’s actions have shocked both the investors and the customers as they surprised everyone by selling bonds. In less than 48 hours after selling all of its assets, SVB went bankrupt. (Barrett, 2023)

Bibliography

Dilek, C (2021, November 25) Electronics industry: Current trends and the COVID-19 effect Segmentify Retrieved March 30, 2023, from https://segmentify com/blog/electronics-industrycurrent-trends-and-the-covid-19-effect/

Smith, C , & Duguid, K (2022, September 22) Jay Powell refuses to rule out us recession after third 0 75 percentage point rate rise Subscribe to read | Financial Times Retrieved April 5, 2023, from https://www.ft.com/content/af12dcb4-bab2-4aa7-8462-2941ca58cd1d

Lioudis, N (2023, March 28)

Inverse relation between interest rates and bond prices

Investopedia Retrieved April 5, 2023, from https://www investopedia com/ask/answers/whyinterest-rates-have-inverse-relationship-bondprices/#:~:text=Most%20bonds%20pay%20a%20fixed,a%20decline%20in%20its%20price.

Jackson, J , Weiss, M , Schwarzenberg, A , Nelson, R , Sutter, K , & Sutherland, M (2021, November 10). Federation of American scientists. Global Economic Effects of COVID-19.

Retrieved April 11, 2023, from https://sgp.fas.org/crs/row/R46270.pdf