Our Analysis of The Silicon Valley Bank Failure in the USA
The bank’s dependence on tech startups and venture capitalists as its main customers, which made it vulnerable to market downturns and valuation losses.
Silicon Valley Bank is a major lender to technology and healthcare companies that collapsed on March 10, 2023 due to a massive run on deposits. It was taken over by federal regulators and its assets were sold to other banks.
It was one of the largest bank failures in U.S. history.
Why did the bank fail? That is definitely a complex question that has many possible answers. According to some analysts, some of the factors that led to Silicon Valley Bank’s failure include:
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- Its high leverage ratio (185:1) which made it vulnerable to liquidity shocks.
- Its exposure to risky loans and investments in technology and healthcare sectors that suffered from market volatility and defaults.
- Its reliance on short-term funding sources such as deposits, commercial paper, and repurchase agreements that dried up amid rising interest rates and investor panic.
- Its lack of adequate capital buffers and contingency plans to cope with a sudden loss of confidence.
Some experts suggest that Silicon Valley Bank’s failure could have been avoided or mitigated if:
- The bank had maintained more cash reserves and diversified its assets and liabilities.
- The regulators had imposed stricter capital requirements and supervision on the bank.
- The central bank had provided more liquidity support and emergency lending facilities to the bank.
Silicon Valley Bank Dependence On Startups
However, these are not definitive or consensus views. There may be other factors or perspectives that we have not covered.
Let us try to explain briefly.
According to some sources, some of these factors include:
- The bank’s dependence on tech startups and venture capitalists as its main customers, which made it vulnerable to market downturns and valuation losses.
- The bank’s failure to diversify its geographic presence and customer base, which exposed it to regional shocks and competition.
- The bank’s lack of community involvement and social responsibility, which eroded its trust and reputation among its stakeholders.