Valley of Fallen Giants: The Tech Bro Bank Collapse and the Case for Financial Inclusion
BY Danial Khan - 2023-03-21
Silicon Valley Bank's (S.V.B.) collapse has sent shockwaves throughout the banking and finance industry. Everybody from the average Joe to Joe Biden has commented on the bank's demise - and why wouldn't they? It's the second-largest banking failure in U.S. history.
S.V.B. is situated in the epicenter of silicon valley and boasts of prominent customers, including Peter Thiel and other tech startups C.E.O.s whose innovations are touted to advance humanity for everybody one day.
Ever heard the phrase you are the sum of the people you associate with the most?
Given their gleaming, cash-rich, and tech-savvy customer base, no one expected this banking collapse to be part of any equation. They were the type of people Mark Zuckerburg would invite to a party to celebrate their collective financial success. But when we look closer at this V.I.P. list of customers, we realize this collapse was a perfect storm just waiting to rain on everybody's bullish parade.
When you have a bank with an exclusive list of V.I.P. tech bros as their clients, it leads to systemic risks that are not easily seen: your bank is more likely to collapse if most of your customers are in the same industry.
S.V.B.'s customers were excellent at raising money through I.P.O. and venture capital investments. They were flush with cash and put their money with S.V.B. A considerable portion of these deposits (USD 92 billion) was invested by S.V.B. in low-interest-yielding government bonds. At the time, this seemed logical because they could not convert these deposits to loans as their customers were cash rich. So instead, they invested them into government bonds to earn a return. This arrangement worked well when interest rates were low, but when they increased, it caused a disastrous scenario that few foresaw.
Firstly, when interest rates rise, the value of bonds typically decreases — this is what happened when the federal reserve hiked rates — the value of S.V.B.'s government bonds decreased in value (by USD 15 billion). This caused a deterioration of their assets, and some customers panicked. They withdrew large sums of their money.
And secondly, interest rate hikes also have a more subtle effect which is not always seen — when they increase, people tend to invest less in the startup and entrepreneurial world because they can invest their money in more secure, higher-yielding financial instruments. Without this funding source, S.V.B. tech company customers were no longer cash rich and had to withdraw their deposits to cover essential expenses like payroll.
Both of these issues worked in unison to deplete S.V.B.'s deposits.
As interest rates continued to rise, withdrawals increased even more, and S.V.B's asset base continued to deteriorate —contagion panic spread like wildfire amongst this close-knit group of Silicon Valley magnates. News spread that S.V.B.'s assets (government bonds) would not be sufficient to cover its liabilities (deposits from tech companies). Ultimately, this forced an unmanageable run on the bank, and regulators had to shut down S.V.B.
We can see that more financial inclusion was needed. If S.V.B. had diversified its customer base, it would have mitigated the risk of its demise.
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