The Untold Story of Silicon Valley Bank and Signature Bank's Downfall: Lessons Learned from Bank Failures

On March 9th, Silvergate Bank, a small bank in the USA, announced bankruptcy. The next day, Silicon Valley Bank (SVB), the 16th largest bank in the USA, also declared insolvency, followed by Signature Bank, the 20th largest bank, on March 12th. The bankruptcy of SVB and Signature Bank became the second and third largest bank failures in American history. The impact was severe, with the stock prices of small and medium-sized banks plunging between 20% and 80%, and more than 20 banks suspending trading. In contrast to the average of about three banks closing down each week in the US, this was a significant event because of the volume and the quality of the banks that failed.

SVB was established in 1983 and listed on NASDAQ in 1988, focusing on deposit and loan business for start-up companies, particularly those in Silicon Valley. Their clients included almost half of US tech and life science start-ups. Although they had nearly 9,000 employees, their physical branches were less than 20, as they did not deal with retail investors. The market value of SVB increased more than 700 times from 1988 to the end of 2022, and the annualized rate of return averaged more than 20%. However, during the pandemic in 2020, SVB made a wrong decision to invest in long-term fixed income bonds, with two-thirds of the newly added $130 billion deposits being spent on them. The sudden influx of money and limited investment options led SVB to invest in these bonds. However, it was not enough to invest this money alone; thus, they had to take risks and invest in long-term fixed income bonds, which contributed to their downfall.

We can learn several lessons. Firstly, it is crucial for banks to maintain adequate liquidity to withstand market volatility and potential losses. Secondly, excessive borrowing can be detrimental, especially if the borrowed funds are not utilized prudently. Thirdly, selling off assets to cover losses is not a sustainable solution and may further damage the bank's reputation and financial standing. Finally, the failure of one bank can create a ripple effect in the financial market and cause widespread panic, as seen during the 2008 financial crisis. It is essential to have proper risk management practices and oversight to prevent such events from occurring.