How the Silicon Valley Bank crisis was averted

That’s not to say that even after deposits are safe, there won’t be consequences from the bank’s implosion. There are uncertain times ahead for those with loans and transaction accounts at Silicon Valley Bank.

It has almost exclusively banked small tech companies and used its expertise to rate loans that other US banks would have turned down.

As such, it was an important part of the innovation ecosystem.

But the intervention of the Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation was not just to take care of these depositors, but to avoid contagion – the risk that depositors would start withdrawing money from other small banks.

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While it’s well known that dealing with startups (including those in the tech space) comes with greater risk, Silicon Valley Bank’s demise isn’t the result of shady lending. Anything but.

The failure of this bank is due on the one hand to the poor management of the bank and on the other hand to rising interest rates.

Although the SVB’s failure has been compared to the global financial crisis, this is a misidentification. The tighter capital ratios and regulatory controls over America’s big banks, imposed in the wake of the global financial crisis, have strengthened the financial system.

Silicon Valley Bank had a series of problems that created a perfect storm.

Its deposit base was disproportionately large – and those funds were overinvested in bonds and mortgage-backed securities, both of which had been radically devalued over the past year as interest rates rose.

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The rapid rise in interest rates also limited the tech company’s ability to find equity to fund its expansion, and in turn they had depleted their deposits at a faster rate.

The deposit base was also particularly concentrated, so a lower number of withdrawals could have an outsized impact on the bank’s funds.

The bank’s misfortune is clearly in the hands of its management, as does what appears to be insufficient hedging to mitigate the risk of its excessive exposure to bonds and mortgage-backed securities.

The larger threats have been removed, but there will be even more pain for small tech companies that were heavily dependent on SVB.

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