Silicon Valley Bank (SVB) was once considered one of the most stable and profitable banks in the United States. With a focus on lending to technology startups and venture capitalists, SVB had grown into a major player in the banking industry. However, in the fall of 2021, the bank unexpectedly collapsed, leaving both depositors and regulators reeling.
Historical Examples of Stable Banks Collapsing
The collapse of SVB raises concerns about the stability of the US banking system as a whole. Despite regulations put in place after previous financial crises, history has shown that even apparently stable banks can fail suddenly. The Great Depression and the Savings and Loan crisis of the 1980s are prime examples of seemingly unshakeable institutions collapsing due to unforeseen changes in economic conditions.
Modern Innovations Complicate Matters
Today’s modern innovations such as social media have made it easier for depositors to share their concerns and quickly withdraw their funds, contributing to rapid run-on-banks. Also SVB’s heavy investment in U.S. Treasury bonds ultimately led to their failure. Depositors feared the bank may not be able to sell these bonds at high enough prices to repay all customers.
The Government’s Response
In response to previous financial crises, the government implemented measures such as Glass-Steagall Act of 1933 and creation of Federal Deposit Insurance Corporation which helped safeguard deposits in banks. Following the 2008-2009 financial crisis, government bailouts and stricter banking regulations were implemented including Dodd-Frank Act of 2010 to prevent another collapse.
Risks Among Smaller Regional Banks
The collapse of SVB has raised concerns about smaller regional banks who may be at greater risk due to poor investment strategies or increased competition from larger banks or fintech companies.
The Importance of Balanced Investing Approach
Investing upheavals can have significant impact and it’s crucial to maintain balanced investing approach. Central banks and regulators can help limit the damage created by market mayhem, but ongoing tightening by central banks can trigger turbulent events. Rising interest rates, which can cause stress and hurt the economy in various ways, should be monitored closely. Investors should consider investing in highly creditworthy forms of fixed income like investment-grade bonds, while high-yield bonds should be approached with caution.
Regulatory Regimes’ Missed Opportunities
Despite regulations put in place post-2008 crisis, regulatory regimes had missed opportunities to detect problems within banking systems. Silicon Valley Bank’s failure highlights how even more-regulated financial sectors can face troubles in terms of regulation and supervision. There is a need to address data and supervisory gaps in the less-regulated nonbank financial sector.
In conclusion, the collapse of SVB has raised concerns about the stability of the US banking system as a whole. The history of collapsed banks due to unforeseen changes in economic conditions was used as evidence for companies that are considering investing or redeveloping their locations. The rise of modern innovations along with failed banks may lead to reckless risks especially on investments on longterm governement bonds. This reinforces the importance of balanced investing approach in times of investment upheavals. While regulatory regimes have been put in place during post-2008 crisis, missed opportunities still persisted despite increased regulations, resulting in difficulties regarding regulation and balance sheet fragilities within even more-regulated financial sectors.
Image Source: Wikimedia Commons
