Silicon Valley Bank, one of the top 20 American commercial banks with $209 billion in total assets at the end of last year, collapsed on Friday morning, following a 48-hour period of bank runs and a capital crisis.
California regulators shut down the bank, and the US Federal Deposit Insurance Corporation (FDIC) took control of it. The FDIC, which insures bank deposits and oversees financial institutions, will liquidate the bank’s assets to repay its customers, including depositors and creditors.
The bank’s decline can be attributed in part to the Federal Reserve’s aggressive interest rate hikes over the past year. Banks had loaded up on long-dated, low-risk Treasuries when interest rates were near zero. However, as the Fed raised interest rates to fight inflation, the value of these assets fell, leaving banks with unrealized losses.
This hit tech especially hard, reducing the value of tech stocks and making it difficult to raise funds, leading to many tech firms withdrawing their deposits from Silicon Valley Bank to fund their operations.
Although analysts predict that Silicon Valley Bank’s collapse is unlikely to cause the kind of domino effect that occurred during the 2008 financial crisis, smaller banks that are disproportionately tied to cash-strapped industries like tech and crypto may face difficulties.
The banking industry is sitting on low-yielding assets, which have sunk due to rate increases over the last year, causing major losses.
Deputy Treasury Secretary Wally Adeyemo reassured the public about the health of the banking system, stating that federal regulators are paying attention to this particular financial institution and that they have the tools necessary to address such incidents.
The Dodd-Frank financial reform overhaul, which became law in 2010, has provided regulators with the tools they need to handle such situations and has improved the capitalization of banks.
Although the banking industry is more resilient than ever before, banks must be cautious when making risky bets, as seen in the past year’s market turmoil.
Silicon Valley Bank’s sudden fall mirrors the issues that other banks face, including Crypto-focused lender Silvergate, which recently announced that it would wind down operations due to financial challenges in digital assets, and Signature Bank, another lender, which has been hit hard by the bank selloff.
