After the 2008 financial crisis, the Silicon Valley Bank crisis and its fall is a lesson for the US Government, one that has some roots in the US Federal Reserve's rate hikes as well
The Silicon Valley Bank (SVB) crisis has more or less become the definition of the US Banking sector, especially with the massive sell off-induced collapse. While the SVB met an unexpected fate after losing almost $80 billion of its market value, many are now wondering if this crisis is the same or worse than the 2008 Lehman Brothers bankruptcy, an event that triggered a historical financial crisis.
Let’s take a look at what all has happened and why this may be a wake-up call for the US Government.
Silicon Valley Bank Collapse – Arguably Biggest Banking Crisis Of Recent Time
The SVB, best known for being a crucial lender for American startups, is experiencing a fast-paced death after the recent ‘bank run’. An institute that took pride in being associated with world’s leading technology start-ups and venture capital firms is now at the mercy of whatever last hope is left.
An Associated Press (AP) report mentions that the SVB’s downfall “is the largest failure of a financial institution since Washington Mutual collapsed at the height of the financial crisis more than a decade ago. And it had immediate effects.”
While the bank faced a mad blow after being hit by nose-diving technology stocks and a volatile NASDAQ, the US Federal Reserve’s moves and repetitive hints at increasing interest rates to control inflation, only made things worse for SVB. Accordingly, several experts have also argued if it were the US Government’s policies, especially of the US Fed that triggered the SVB collapse at a time when it was trying to survive.
To understand this, one must take into perspective that when the US Federal Reserve rates were near zero, banks stocked-up on long-term and low-risk treasuries. However, with the nasty interest rate hikes since 2022, the value of those assets gradually reduced, leaving banks sitting with losses. Apart from Fed’s interest rate hikes, the value of treasuries and securities also lowered.
But from what has come to light, it must be understood that the Silicon Valley customers withdrawing their deposits from the bank was not a big issue, initially. It only became big when the bank needed to start selling its own assets to meet their customer withdrawals. Hence, when SVB faced the bank run, banking regulators too, were forced to seize all assets of the Silicon Valley Bank in order to protect what’s left.
SVB Crisis In The Wake Of 2008 Financial Crisis
To recap, the 2008 financial crisis is arguably considered to one of the biggest to rock the global economy after the Great Depression. It was a time when the world saw the mortgage-backed securities and value of housing loans, all falling apart.
Now, it must be understood that major banks tend to have exposure to one another. Hence, when a financial faux pas like this happened, it was natural for the system to break, putting thousands out of jobs. It was also the time when Lehman Brothers, a firm as old as 1847, collapsed to never revive again.
However, when it comes to the collapse of the Silicon Valley Bank, while many experts do see this as a major crisis, they don’t necessarily see it as a bigger problem for the banking sector as the SVB collapse is reportedly more company-specific. As per the AP report, “Silicon Valley Bank was large but had a unique existence by servicing nearly exclusively the technology world and VC-backed companies. It did a lot of work with the particular part of the economy that was hit hard in the past year. Other banks are far more diversified across multiple industries, customer bases and geographies. “
Whether or not the SVB collapse extends to the banking sector is for time to see, however, at this point, one can’t deny that the US Government may have to look inside and take this as a wake-up call to dodge anymore headwinds that may lie ahead.