- Helen Raleigh
Understand Silicon Valley Bank’s Failure
Silicon Valley Bank (SVB), the 16th-largest bank in the U.S., collapsed last Friday, becoming the second-largest bank failure in U.S. history after the downfall of Washington Mutual in 2008. Unlike Washington Mutual, SVB’s failure is not due to reckless lending but has much to do with our government’s monetary and fiscal policies.
Headquartered in Santa Clara, California, SVB was once the largest bank in Silicon Valley. Its geographical location meant that most customers were tech startup entrepreneurs and employees. Due to the bank’s unique customer base, the bank’s recent boom and bust was especially beholden to the Federal Reserve’s interest rate policies.
Three years ago, in response to the Covid-19 pandemic, the Federal Reserve cut the interest rate to near zero and flooded the U.S. economy with cheap money. Tech startup companies thrived as investors were willing to fund higher-risk ventures when the borrowing costs were low. Matt Levine of Bloomberg explained that back then, those tech companies could easily raise money in the stock market, so they didn’t need to borrow money from SVB. Instead, these companies deposited their new wealth with SVB. Thus, SVB saw its deposits grow from $60 billion by the end of the first quarter of 2020 to about $200 billion in two years.
Having too much cash can be a problem. Unable to grow its loan portfolio fast enough, SVB faced limited choices for generating returns with its cash holdings in the zero-interest environment.
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