Examining the Deeper Circumstances of Silicon Valley Bank’s Collapse – What Can We Take Away?

Will the collapse of Silicon Valley Bank have the same effect as the financial misfortunes of 2008, potentially prompting other banks to follow suit due to depositors’ lack of confidence in their money’s safety?

Regulators shut down Silicon Valley Bank, situated in Santa Clara, California last Friday. This collapse was the second biggest in the history of the US and the greatest since the 2008 economic crisis.

The question of whether other banks will suffer a similar fate has been raised after the closure of Signature Bank in New York on Sunday.

Federal Reserve, Treasury and Federal Deposit Insurance Corporation regulators rushed to mitigate the consequences of the situation, revealing in a collective announcement on Sunday that customers of Silicon Valley Bank would be able to access all of their funds beginning Monday. The same plan would be put into effect for Signature Bank.

Shareholders, not taxpayers, were emphasized to take on the financial losses of the bank.

What occurred?

The facts of the Silicon Valley Bank incident are simple. Amidst the pandemic, tech businesses gained considerable earnings, some of which they placed in the Silicon Valley Bank. With their funds, the bank acted as most banks do: they held a portion in reserve and allocated the rest – investing a substantial amount into long-term government bonds that would produce favorable returns when interest rates were low.

Beginning more than a year ago, the Federal Reserve increased interest rates to higher than 4.5%. This had two impacts. The worth of Silicon Valley Bank’s Treasury bond holdings decreased due to newer bonds paying more interest. As interest rates rose, investment capital to tech and startup companies declined since venture funds needed to pay more to borrow money. Thus, these companies had to pull out more of their funds from the bank to cover their costs and payrolls.

The bank, however, was found to lack the necessary funds.

In the movie It’s a Wonderful Life, the Jimmy Stewart character attempts to ease the tension of customers withdrawing their deposits from his bank. He explains that the funds were loaned to people in the same neighbourhood, and they will receive their money back if they just wait patiently. This scene reveals a deeper story.

In the early 1930s, bank runs were a frequent occurrence. The Roosevelt administration, however, took action by introducing laws and regulations that obliged banks to retain more capital, preventing them from investing their depositors’ money for their own gain (through the Glass-Steagall Act). Furthermore, they insured deposits and conducted rigorous scrutiny of the banks. As a result, banking became more secure yet uninteresting.

The regulations that were in place up until the 1980s were eventually taken down by Wall Street financiers who saw the potential for financial gain. This culminated in 1999 with the repeal of the last of the Glass-Steagall regulations, which was signed by Bill Clinton and Congress.

In 2008, the great economic collapse since the beginning of the Great Depression occurred. This was a direct consequence of the deregulation of the finance industry. Alan Greenspan, the past Chairman of the Federal Reserve from 1987-2006, referred to it as a “once-in-a-century credit tsunami”. When faced with criticism however, he conceded that the crisis had caused him to re-examine his free market philosophies. He admitted to a congressional committee, “I have found a flaw. I made a mistake…I was shocked.”

Astonished? Genuinely?

Once banking deregulation was implemented, a crash was bound to happen. Before the 1950s and 1960s, when banking was dull, the financial sector only accounted for 10-15% of US corporate profits. With deregulation, finance became more thrilling and much more profitable. By the mid-1980s, the financial sector’s share of corporate profits had risen to 30%, and by 2001 – when Wall Street had become a massive gambling house – the sector accounted for 40%, which was more than four times the profits from all US manufacturing.

In 2008, the Bush administration stepped in to shield investment banks when the bubble burst. Hank Paulson, ex-Goldman Sachs CEO, and Timothy Geithner, New York Fed President, came to the aid of Bear Stearns but allowed Lehman Brothers to fail. This caused the stock market to crash. AIG, an insurance provider with billions of dollars worth of credit on the Street, was in danger of failure, as was Citigroup (where Robert Rubin had moved after endorsing the Glass-Steagall repeal). Citigroup had placed large wagers on mortgaged-backed assets.

Paulson implored Congress to approve of the $700bn bailout of the financial industry. He and Bernanke, the Federal Reserve Chairman, argued that the only way to avoid another Great Depression was the implementation of the taxpayer bailout of Wall Street.

Obama gave his stamp of approval for the Wall Street bailout and chose a squad of Clinton-era economic consultants (headed by Geithner, who later became Obama’s treasury secretary, and Lawrence Summers, who was appointed director of the national economic council). These were the same individuals who, working for Rubin in the 1990s, had facilitated the financial crisis by eliminating regulations on Wall Street. Geithner, as chair of the New York Fed, oversaw Wall Street in the years before the calamity.

The Obama administration eventually assisted Wall Street, though the price to taxpayers and the economy was immense. Calculations of the amount of the bailout range from a half-trillion to multiple trillions. Additionally, the Federal Reserve proffered gigantic handouts to the major banks in the form of no-interest loans. However, the homeowners whose properties were worth less than what they owed on their mortgages were totally neglected; numerous lost their homes.

By so doing, Obama caused the everyday people of America to bear the burden of the bankers’ risk-taking, intensifying the perception that the political process was becoming manipulated to benefit the wealthy and influential.

The Dodd-Frank regulations that were implemented in the wake of the financial crisis were not as stringent as the banking rules of the 1930s. The Fed required the banks to undergo stress tests and maintain a certain level of cash on their balance sheets as a safeguard, however, it would not forbid them to risk their investors’ money. The reason for this is due to the influence of Wall Street lobbyists, whose campaigns were well-funded by the Street.

The Silicon Valley Bank’s collapse on Friday was foreseeable, as the Federal Reserve’s swift and drastic increase of interest rates had the potential to diminish the financial backings of some banks that had invested in Treasury bonds. So, why didn’t the regulators act?

Donald Trump’s decision to roll back the thin protections of Dodd-Frank in 2018, including the removal of the requirement for banks with assets under $250 billion to undergo stress testing and the decrease of the amount of cash they had to keep on their balance sheets, has allowed smaller banks like Silicon Valley Bank and Signature Bank to invest more of their deposits and make greater profits for their shareholders and CEOs (whose compensation is directly linked to the bank’s success).

Greg Becker, the CEO of Silicon Valley Bank, was an avid supporter of Trump’s rollback plan. He previously sat on the San Francisco Fed’s board of directors.

Becker, under the guidance of a trading plan, disposed of $3.6m of Silicon Valley Bank stock fewer than two weeks prior to the revelation of their significant losses that caused their downfall. Although there is no illegality behind these types of corporate trading plans, and the coincidence of the timing may be purely accidental, it still appears to be highly suspicious.

It is uncertain whether the collapse of Silicon Valley Bank will cause an epidemic of other bank failures, as it did in 2008, due to anxious depositors. The quick action taken by regulators over the weekend implies they have worries. The Wall Street crisis in 2008 and the financial crisis of 1929 both commenced with several bank failures.

Silicon Valley Bank has a presence in several European Union (EU) member states through its subsidiary, SVB Financial Group UK Limited. In addition to the UK, SVB has offices in several other EU member states, including Germany, Ireland, and Spain. These offices focus on business development and relationship management, enabling SVB to provide support and expertise to technology and life science companies across the EU.

In Germany, SVB has offices in Frankfurt and Munich, which provide banking services to emerging and high-growth technology and life science companies, venture capital firms, and private equity firms. SVB’s services in Germany include lending, deposit and cash management, global treasury and payments, foreign exchange, and investment banking services, such as M&A advice, public offerings, and private placements.

In Ireland, SVB has offices in Dublin, which provide banking services to technology and life science companies, venture capital firms, and private equity firms. SVB’s services in Ireland include lending, deposit and cash management, global treasury and payments, foreign exchange, and investment banking services.

In Spain, SVB has an office in Barcelona, which provides banking services to technology and life science companies, venture capital firms, and private equity firms. SVB’s services in Spain include lending, deposit and cash management, global treasury and payments, foreign exchange, and investment banking services.

In Israel, SVB provides banking services to technology and life science companies, venture capital firms, and private equity firms, with a focus on serving emerging and high-growth companies in the region. The bank operates in Herzliya and provides a range of services, including lending, cash management, and foreign exchange.

In China, Silicon Valley Bank provides banking services to technology and life science companies, venture capital firms, and private equity firms, with a focus on serving early-stage and high-growth companies. The bank operates in Shanghai and provides a range of services, including lending, cash management, and foreign exchange.

Latest news about the European banking system are not good at all:

On Wednesday, the Swiss National Bank (SNB) and Swiss financial market regulator FINMA issued a joint statement declaring their readiness to offer financial assistance to Credit Suisse. The announcement came after Credit Suisse’s shares experienced a significant drop of up to 30%. The SNB assured that Credit Suisse meets the strict requirements for capital and liquidity imposed on important banks. The statement also stated that the recent problems of some banks in the US do not pose a direct risk of contagion for the Swiss financial markets, and there are no indications of any direct risk of contagion for Swiss institutions due to the current turmoil in the US banking market. The SNB promised to provide Credit Suisse with liquidity if necessary.

 According to the CNN : The dramatic meltdown of Silicon Valley Bank is proving one thing for sure — the biggest systemic risk to the United States lies not in its banking system but in its polarized politic.

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