March 19, 2023
NPR recently published a segment featuring Mark Williams, Master Lecturer of Finance, discussing the collapse of Silicon Valley Bank and how it has been a victim of its own success.
Between 2020 and 2022, SVB’s tech company customers tripled its deposit base, bringing in billions and billions of dollars during the early pandemic. All those billions were the result of the bank’s risk-taking in lending money to start-ups and companies that couldn’t get loans elsewhere. SVB stowed all the billions it earned from taking these risks in US government bonds. Although US bonds are considered to be the safest investment, they are not super profitable. Because the bank bought its government bonds before interest rates rose, the bond price is directly linked to interest rates. Older bonds lose market value when interest rates rise because new bonds pay higher interest rates. When rates started climbing quickly, the price of Silicon Valley Bank’s bonds tumbled and took huge losses by selling off its bonds, resulting in investors pulling out their money quickly.
“In a single day last week, depositors knocked on the door and pulled 41 billion depositor dollars out,” says Williams. “That’s about a quarter of their total deposits. No bank, no matter how strong, could ever survive that sort of withdrawal… that sort of run on the bank.”
It is believed that investors are now depositing their money into big banks that customers see as safer or into US government bonds.
