Bank fail: How rising interest rates paved the way for Silicon Valley Bank's collapse (2024)

FAQs

What was the main reason for the collapse of Silicon Valley Bank? ›

Why did it collapse? The collapse happened for multiple reasons, including a lack of diversification and a classic bank run, where many customers withdrew their deposits simultaneously due to fears of the bank's solvency. Many of SVB's depositors were startup companies.

Besides loans, banks also invest in bonds and other debt securities, which lose value when interest rates rise. Banks may be forced to sell these at a loss if faced with sudden deposit withdrawals or other funding pressures.

When interest rates started going up, the market value of Silicon Valley Bank's bonds went down. That's because the bank bought its government bonds before interest rates started going up. The price you get from bonds is directly tied to interest rates.

The Fed took aggressive action, and tech stocks, which had benefited SVB, lost momentum as a result of higher borrowing costs. Long-term bonds that SVB and other banks bought during the time of extremely low, near-zero interest rates also lost value as a result of higher interest rates.

Over a period of just two days in March 2023, the bank went from solvent to broke as depositors rushed to SVB to withdraw their funds, resulting in federal regulators closing the bank for good on March 10, 2023. SVB's collapse marked the second largest bank failure in U.S. history after Washington Mutual's in 2008.

Free Checking¹ Free unlimited wires, bill pay, mobile deposits with no monthly/transaction fees. Up to 5.10% annual percentage yield on qualifying balances² Our startup money market account helps grow your savings and your business. 2X Unlimited Rewards³ Earn 2 points for every $1 spent on your SVB Innovator Card.

Consulting firm Klaros Group analyzed about 4,000 U.S. banks and found 282 banks face the dual threat of commercial real estate loans and potential losses tied to higher interest rates. The majority of those banks are smaller lenders with less than $10 billion in assets.

It's also an optimal confluence of events for banks, as they borrow on a short-term basis and lend on a long-term basis. Note that if interest rates rise too high, it can start to hurt bank profits as demand from borrowers for new loans suffers and refinancings decline.

A higher interest rate environment can present challenges for the economy, which may slow business activity. This could potentially result in lower revenues and earnings for a corporation, which could be reflected in a lower stock price.

Silicon Valley Bank (SVB) failed because of a textbook case of mismanagement by the bank. Its senior leadership failed to manage basic interest rate and liquidity risk. Its board of directors failed to oversee senior leadership and hold them accountable.

How did a rise in interest rates contribute to the collapse of Silicon Valley Bank, Signature Bank, and First Republic? ›

First Republic's undoing was triggered by the Federal Reserve's rapid series of interest-rate increases, which led depositors to seek better returns elsewhere. That meant it had to pay more to keep them, just when rising rates were battering the value of its mortgage portfolio.

Failure of Silicon Valley Bank Reduced Local Consumer Spending but Had Limited Effect on Aggregate Spending. The failure of Silicon Valley Bank (SVB) on March 10, 2023, raised concerns that deteriorating financial market conditions would reduce consumer spending.

Most significant, the nation learned over the weekend that Silicon Valley Bank, the 16th largest depository institution in the United States, was deemed by the government to be too big to fail — at least in the sense that the normal rules for allocating losses were set aside.

SVB's risk management framework was clearly deficient since it is evident that it did not effectively manage the bank's exposure to its funding risk, asset/liability mismatch risk, interest rate risk, funding liquidity risk and market liquidity risk.

On Friday, March 10, 2023, Silicon Valley Bank, Santa Clara, CA was closed by the California Department of Financial Protection & Innovation and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No advance notice is given to the public when a financial institution is closed.

On March 10, 2023, Silicon Valley Bank (SVB) failed after a bank run, marking the third-largest bank failure in United States history and the largest since the 2007–2008 financial crisis. It was one of three bank failures, along with Silvergate Bank and Signature Bank, in March 2023 in the United States.

Banks affected were First Republic Bank, PacWest Bancorp, Regions Financial and Zions Bancorporation. Even shares of big banks lost ground in the aftermath of the SVB and Signature collapses, including Wells Fargo, JPMorgan Chase and Citigroup.

Silicon Valley Bank went into a tailspin, and so did the markets: Stocks dropped. Investors rushed into bonds, pushing prices up and yields down. But now, a few days after SVB 's failure, the fear of a broad banking crisis is fading. The markets panicked but clearly weren't paralyzed.

Poor risk management can lead to significant losses, erode the bank's capital, and eventually lead to failure. Economic Downturns. Banks are highly dependent on the overall health of the economy. During a recession, banks are more likely to experience loan defaults, lower profits, and higher operating costs.