Rising Interest Rates Leads to the Fall of Silicon Valley Bank

By Deana D. Boles

The Silicon Valley Bank made its way to the forefront during the early days of the pandemic. Courageous enough to take the risk, the Silicon Valley Bank lent money to start-ups, companies and entrepreneurs that were unsuccessful during their quest for a loan at other establishments.

“Silicon Valley Bank was just flush,” said Mark Williams, a professor of finance at Boston University and a former bank examiner for the Federal Reserve. “It’s deposit base tripled between 2020 and 2022, with billions and billions of dollars flowing in.”

With the increased surplus of cash, the bank decided to invest in long-term United States government bonds. Bonds are known for being a secure, riskless, guaranteed investment. At the end of your investment term, the government will pay you back what you initially invested plus interest.

So, what can possibly go wrong?

Silicon Valley Bank invested billions of dollars into long-term bonds without weighing out their risks. Not only were they locking up their money for years, but once the federal government began raising interest rates, the value of the bank’s bonds went down. The bank purchased the government bonds before interest rates started going up. Once the federal government raised these interest rates, bonds lost market value, which is what happened to Silicon Valley’s bonds— they began to lose value.

Many of the bank’s depositors were highly wealthy and successful, making them more susceptible to make a break for it if they sensed any trouble. Therefore, once rumors started about the bank’s depletion of value, customers began to panic and urgently pulled their money from the institution.

Quickly, the Silicon Valley Bank needed millions, or even billions of dollars as an influx of customers took to closing their accounts. The problem? The bank had already tied up the money in government bonds.

Silicon Valley Bank was left with no other option than to cash out their already low interest rated bonds. While the bank continued to take huge losses as they sold their bonds, hysteria encircled the ordeal, causing more investors to pull their funds.

“In a single day last week, depositors knocked on the door and pulled 41 billion depositor dollars out,” said Williams, “That’s about a quarter of their total deposits. No bank, no matter how strong, could ever survive that sort of withdrawal… that sort of run on the bank.”

Actress Sharon Stone revealed at a cancer research fundraiser in Beverly Hills this week that she was one of many that were financially rocked by the market-spooking enterprise’s demise.

“I’m a technical idiot, but I can write a f—ing check,” Stone told the turnout at the event. “And right now, that’s courage, too, because I know what’s happening. I just lost half my money to this banking thing, and that doesn’t mean that I’m not here.”

The Silicon Valley Bank’s failure is the largest bank failure since 2008. Many have pointed the finger at the federal government. In response, the government has announced that they will review the bank’s collapse, set to conclude on May 1.