FINANCE: Students, experts discuss historic Silicon Valley Bank failure


The markets woke to inclement weather Friday as a deluge of investor pullbacks signaled the failure of Silicon Valley Bank and the biggest bank breakdown since the Great Recession of 2008. 

SVB was a key lender to early-stage businesses, partnering with nearly half of all United States venture capital-based startups. Multi-billion-dollar companies such as Roku, Roblox and Circle have described uncertainty in their ability to recover their cash from the bank, and online megastore Etsy has warned sellers it will not be able to process payments.

For Cindy Yang, a sophomore majoring in business, economics and religion, the news came as a surprise because she had interviewed to join the bank just last week. 

“I had the interview with them last Friday,” Yang said, “and I read the news today — in exactly a week, [we’re] seeing the fall of SVB. I just thought it was such a coincidence.”

SVB shares plunged more than 60% Thursday in the biggest one-day drop on record before its activities were shuttered by regulators at the Federal Deposit Insurance Corporation. Some $175 billion in customer accounts were taken over by the regulators, who will try to return money to the bank’s customers. While the FDIC insures a maximum of $250,000 for each of the bank’s customers, regulatory filings from December 2022 indicate that more than 95% of the bank’s deposits were uninsured, triggering calls for government intervention.

The firm was scrambling to raise money to reduce the $1.8 billion loss it incurred from assets it sold which had been negatively affected by the Federal Reserve’s consistent interest rate hikes that have characterized an inflationary economy since March 2022.

When inflation was relatively lower, SVB maximized the low interest rate environment such that venture capitalists’ deposits into the bank quadrupled between 2017 and 2021, as California’s technology industry boomed. To build on these deposits, the bank made large-scale investments into mortgage bonds and treasuries, but did so at their peak price. As venture capital fundraising dried up in 2022, SVB’s clients ran down their deposits, but it was unable to pay them back.

Rodney Ramcharan, professor of finance at the Marshall School of Business, said the crux of SVB’s issues was “a lack of diversification.”

“The Fed, a year ago, began to telegraph that it would be raising interest rates,” Ramcharan said. “Any reasonable risk manager understood that bond prices were going to be falling in the next year [and] interest rates going up.”

Glass entrance doors to SVB building
Federal regulators seized some $175 billion in Silicon Valley Bank accounts and will try to return the money to customers. (Tomoki Chien | Daily Trojan)

The collapse of the California-based bank sent shockwaves through the banking industry domestically and internationally. U.S. banks have lost over $100 billion in stock market value as the events of the last two business days have transpired, with European banks losing a further $50 billion in value. 

Ramcharan harked back to the savings and loan crisis of the 1980s, wherein the financial sector suffered a meltdown surrounding smaller banks, and the “S&L sector was completely decimated.” Many banks “with exposure to the tech sector are going to experience some problems,” Ramcharan said.

SVB’s tribulations coincided with the abrupt shutdown of Silvergate, one of the largest banks that dealt in cryptocurrency. With industry heads such as Treasury Secretary Janet Yellen fostering confidence in the resilience of banking but still monitoring the crisis “very carefully,” only time will tell how deeply incorporated the industry is to SVB’s dealings, said Romain Ranciere, professor of economics and chair of the economics department.

“Typically, what the Fed does is some stress testing,” Ranciere said. “It takes some time, you have to find the right scenario. In two or three weeks, there will be a clear idea.”

Across the U.S. banking system, there exists a total of $18 trillion in commercial bank deposits, of which it is estimated just $10 trillion are insured. Despite this creating some concerns that there will be a run on banks by uninsured depositors, something that might exacerbate SVB’s issues and turn it into a systemic one, Ramcharan said that he believes the SVB fallout to be a “localized event.”

“I don’t think that, as of [Friday] morning, there has been a massive line of people trying to get their funds out of these big banks [such as Bank of America and JPMorgan Chase],” Ramcharan said. “Even during the financial crisis, it was not the case that these very big banks faced an exodus of funds.”

The deposits are solid as long as people trust you. … One thing that SVB said: ‘Don’t panic.’ If you start saying, ‘Don’t panic,’ I think that’s the best way to trigger a panic.

Romain Ranciere, professor of economics and chair of the economics department

Ranciere also said he believed large scale bank panics were a far-off prospect, citing changes in the makeup of the banking industry since the Great Recession, when financial institutions such as Merrill Lynch and Lehman Brothers hit trouble. To date, the fall of Washington Mutual in 2008 remains the only bank failure whose size dwarfs that of SVB.

“Now, it’s a bit of a different model. There is no model of merchant banks that have no deposits and finance their entire balance sheet on the short term money market, so I think this type of vulnerability doesn’t exist anymore,” Ranciere said.

However, big-name investors — such as PayPal’s founding Chief Operations Officer David Sacks and billionaire hedge fund manager Bill Ackman — have been urging the government to act to protect mid-size banks since SVB’s collapse. They are among many citing concerns that its failure could reduce confidence in banks with under $250 billion deposits, which are not subject to regular stress tests or other federal safety measures passed after 2008. 

“It’s possible that, come Monday morning, we find out there are big linkages that nobody understood, and then that’s chaos — but I don’t know what the likelihood of that is,” Ramcharan said.

Ranciere said that if concerns regarding the banking industry were to materialize, the Fed would “step in and will probably provide some emergency funding to the banks the same way they did in 2008, to substitute basically fed funding to market funding.”

First Republic Bank and Western Alliance were among lenders that sought to calm investors Friday about the steady strength of their liquidity and deposits as their share prices lost between 15% to 35%. 

“The deposits are solid as long as people trust you,” Ranciere said. “One thing that SVB said: ‘Don’t panic.’ If you start saying, ‘Don’t panic,’ I think that’s the best way to trigger a panic.”

SVB’s collapse has potential implications on the direction the Fed takes in steering the economy through monetary policy. The agency’s policy of increasing interest rates to tackle inflation have been creating higher costs of business and have had a drag on the stock market. 

Prior to Thursday, traders in the futures market predicted a 70% chance that the Fed would take a more hawkish stance and double its interest rate hike to 50 basis points on March 22. However, they reversed this prediction and placed about a 60% probability on a 25 basis point rise instead. Abraham Solovy, former vice president of the Economics Association and a senior majoring in political economy, said it would be difficult for the Fed to justify “a 50 basis point increase when the government might have to bail out a bank.”

“This might be the silver lining to this whole thing,” Solovy said.