The Collapse of Silicon Valley Bank: Uncovering the Risks of Leveraged Banking
The recent collapse of Silicon Valley Bank (SVB) has shined a spotlight on the risks of leveraged banking. SVB was founded in 1983 and had become one of the most powerful lenders for venture startups, with $209 billion in assets as of December 31, 2022. The bank was heavily invested in mortgage-backed securities, which became a problem when the Federal Reserve raised interest rates. SVB catered to a strategically important market, but its risk management practices were weak.
In the fourth quarter of last year, SVB reported more than $200 billion in assets, most of which were to venture and private equity firms. The bank had a significant number of large and uninsured depositors — clients with accounts totaling more than the up to $250,000 guaranteed by the FDIC. This made the bank vulnerable to a bank run.
When the Federal Reserve raised interest rates, SVB’s securities lost significant value. SVB was unable to pay its fleeing customers back and went under. SVB’s parent company sold $21 billion of assets at a $1.8 billion loss and was going to sell $1.75 billion worth of shares to help plug that hole. As a result, SVB’s paper losses became real losses, leading to its collapse.
The failure of Silicon Valley Bank has been attributed to an absurd 2018 bank deregulation bill signed by Donald Trump. Moreover, some analysts argue that regulators did not pay careful enough attention to unrealized losses on SVB’s balance sheet. On Monday, some big banks provided a $30 billion rescue package for First Republic bank, one of the embattled regional lenders.
Overall, the collapse of SVB has highlighted the vulnerabilities of leveraged banking. This underscores the need for stronger oversight and stronger liquidity and capital requirements to withstand financial shocks.
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