In March 2023, three mid-sized banks–Silicon Valley Bank, First Republic Bank, and Signature Bank– collapsed, triggering a decline in stock market prices. The first bank to collapse was the Silicon Valley Bank (SVB), filing for bankruptcy on March 17, which triggered the largest financial crisis since 2008.
What happened?
One way that banks make money is that they invest their money into the economy. The Silicon Valley Bank largely invested their money in the bond market, holding around $91 billion in bonds, according to the Financial Times. SVB invested billions into the US government bonds, which was thought to be a safe investment. However, what was not foreseen was the sudden hike in interest rates last year which forced the bank to sell some of its bonds. This news created a wave of panic as customers began to withdraw their money. This caused SVB stocks to go down by 60%, news of which spread over social media, triggering a bank run and creating even more unrest. A bank run is when many different people try to get reimbursed or take their money out but banks do not have enough physical money to pay them back because banks invest their money in markets. This causes more panic, more dropping stock prices, and creates a negative circle. It took 36 hours for this bank to fail. SVB’s collapse created a chain reaction as other banks faced similar debt-related issues.
What was significant about Silicon Valley Bank?
The Silicon Valley Bank was founded in 1983, forty years ago, and was the sixteenth largest bank in the United States before its fall. Based in California, the bank had over $200 billion in assets according to the Federal Deposit Insurance Corporation. Silicon Valley was previously housing the finances for almost half of all US healthcare and venture-backed technology companies (businesses that use venture capital funds to start up). The coronavirus pandemic in 2020 drew in many technology company customers to the SVB because of the increased amount of digital services and online activity. SVB invested much of the money that they held for tech companies into US treasury bonds.
What happened to the US government and treasury bonds?
Bonds act like loans; you give the government money for a certain period of time (months, years, ect) that gets paid back, with interest, at the end of that time. Investing in US bonds is usually a riskless investment because the US government pays back its debts, a ‘riskless asset.’ However, while these bonds are on the safer side, they are not very profitable. Since long term bonds usually pay more compared to short term, SVB invested billions of dollars into 10 year bonds.
This money was locked up for years; in the case of an emergency, SVB would have trouble taking that money back out. Therefore, when interest rates started getting higher, the value of these bonds went down. This concerned customers who started to pull out their money. The problem was that SVB did not have enough tangible money (as it was all locked up in 10 year bonds) to pay back their customers, very rich companies, who would pull out millions of dollars at a time. SVB had to act fast, so they sold many of their bonds at a significant economic loss. This caused even more panic, and more investors began withdrawing and a run on the bank occurred.
Who did this affect?
People from all over the country were similarly scared and they started taking money out of smaller banks. Other banks, like Signature Bank, were impacted by SVB’s fall and are facing similar issues.
Image Source: WBUR
Sources used:
https://en.wikipedia.org/wiki/Collapse_of_Silicon_Valley_Bank
https://www.cnn.com/2023/03/17/business/global-banking-crisis-explained/index.html
https://www.wsj.com/articles/bank-collapse-crisis-timeline-724f6458
https://www.american.edu/cas/news/banking-crisis-how-did-we-get-here-whats-next.cfm
https://en.wikipedia.org/wiki/2023_banking_crisis
https://www.theguardian.com/business/2023/mar/17/why-silicon-valley-bank-collapsed-svb-fail
