What Happened to Silicon Valley Bank?

 

By now, everyone’s heard the Silicon Valley Bank collapse story. Its repercussions are, at present, still sending shockwaves across the banking system, leaving the experts, pundits, the Fed, and everyone wondering if another pillar will drop or can the system hold together.

While the collapse of Silicon Valley Bank (SVB) seemingly happened overnight, were there warnings and red flags indicating they were in trouble? In 2022, SVB began borrowing from the Federal Home Loan Banks system to the tune of $15 billion. Many consider the FHLB loan program a lastditch effort for a bank in trouble, raising more questions about the lack of monitoring and oversight.

Tim Snyder, Economist at Matador Economics and host of Gasonomics, said rising interest rates and inflation negatively impacted SVB’s liquidity.

“The economic impact from rising prices is one issue for the bank, but how inflation has affected its borrowers, especially its startups, are of specific concern,” Snyder said.

The primary business model for SVB is investment in startups. The very nature of startups poses a risk, which raises another critical question, did SVB do enough to hedge their assets, and if not, why weren’t safeguards put into place?

“SVB has a portfolio full of techsector operations and startups. Startups in this sector are notoriously laden with debt, especially early on in their development, so we consider them interestrate sensitive,” Snyder said. “It has been reported that Silicon Valley Bank is the sixteenth largest bank in this country. It did not have a liability management program or hedging program to manage risk. These types of programs are considered the industry standard. It is concerning, and bears some investigation, to determine why they were not in place, and in effect, especially in a time of rising interest rates.”

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