Why Did Silicon Valley Bank Fail? $SVIB

Silicon Valley Bank saw massive growth between 2019 and 2022, which resulted in it having a significant amount of deposits and assets. While a small amount of those deposits were held in cash, most of the excess was used to buy Treasury bonds and other long-term debts. These assets tend to have relatively low returns but also relatively low risk.

But as the Federal Reserve increased interest rates in response to high inflation, Silicon Valley Bank’s bonds became riskier investments. Because investors could buy bonds at higher interest rates, Silicon Valley Bank’s bonds declined in value.

As this was happening, some of Silicon Valley Bank’s customers—many of whom are in the technology industry—hit financial troubles, and many began to withdraw funds from their accounts.

To accommodate these large withdrawals, Silicon Valley Bank decided to sell some of its investments, but those sales came at a loss. SVB lost $1.8 billion, and that marked the beginning of the end for the bank.

Some people believe that Silicon Valley Bank’s failure started far earlier with the rollback of the Dodd-Frank Act, which was the major banking regulation that was put into effect in response to the financial crisis of 2008.

As a part of Dodd-Frank, banks with more than $50 billion in assets would be subject to additional oversight and rules.

But the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, signed into law by President Donald Trump, significantly changed that requirement. Instead of setting the threshold at $50 billion, the 2018 law increased it to $250 billion.

Despite being the 16th largest bank in the country, Silicon Valley Bank didn’t have enough assets to be subject to the extra rules and oversight. If the threshold was never changed, SVB would have been more closely watched by regulators.