On Friday, the 10th of March, Silicon Valley Bank based in Santa Clara, California collapsed, making it the second-largest bank to fail in the history of the United States. What started as a dream of two former Bank of America employees in 1983 was at its peak with over $209 billion when it failed to function. Although it was originally meant to assist the growing startup culture in Silicon Valley with loans and financial advice, it later served thousands of international clients and businesses becoming the 16th largest bank in the United States. Earlier when the bank collapsed, the Federal Reserve had taken over its functions. A few days back, Senator Elizabeth Warren and Representative Alexandria Ocasio-Cortez had written letters to as many as 14 of Silicon Valley Bank’s major depositors inquiring about their relations with the now-fallen bank.
What caused the fall?
The predominant cause of this collapse was the investment made by the bank in treasury and mortgage bonds which are held-to-maturity investments and can’t be liquified before a particular period of time without sustaining significant losses. Beginning in 2023, the value of its mortgage-backed securities fell as a result of high-interest rates which made taking loans less profitable. Following this dip in the value of these securities, the value of the Silicon Valley Bank bonds dropped by $15 billion. This however was not a registered loss for the bank; the value could have appreciated back to the original amount once the interest rates were back to normal. The real problem started when their clients started drawing out their money from the bank as a consequence of fear or the need to run their businesses without taking loans at higher interest rates. As clients liquidated their assets, the bank incurred significant losses from selling their bonds before they matured. On March 8th, the Silicon Valley Bank disclosed the sale of bonds worth $21 billion. When the bank tried raising over 2 billion dollars to cover up for their losses, the clients were taken by surprise and decided to withdraw their investments from the bank resulting in the collapse. Furthermore, social media has also been a contributing factor that escalated the situation for the bank. People took to Twitter about their investments in the SVB when the values of the bonds plummeted which spread fear among the investors who started withdrawing their money.
Friends with benefits?
Silicon Valley Bank was known for organizing extravagant events, parties, and ski trips for its major investors which has led the lawmakers on the case to wonder if there were any additional benefits that the bank provided its important clients. There have been reports which claimed that the Silicon Valley Bank pampered some of its major clients with special benefits in exchange for large unsecured funds which they could keep over a short period of time. Now the people working on this case are wondering if the closeness of the bank with these firms went beyond business-client interests. The friends of the failed bank that received a letter asking about their connections with the bank include Circle, BlockFi, Roblox, Roku, and Sangamo Therapeutics among other big names.
Why were letters sent?
These details that have been requested in the letters ask these companies to disclose their relations with the fallen bank. The lawmakers working on the case now suspect that the sudden collapse of the bank might have something to do with the exchange of money and benefits among these companies.
Response:
In a statement made by Senator Elizabeth, she said that Silicon Valley Bank’s unusually close relationship with its clients increased the threat of contagion. She further added that the people of America have every right to know what arrangements were made among these mutual friends and how they escalated the bank’s collapse.
All the companies have been given time till 24th April to provide the details asked for and prepare their response.
