Why Did Silicon Valley Bank and Credit Suisse Bank Fail?

Silicon Valley Bank (SVB) and Credit Suisse Bank (CSB) are big banks that invest in tech and finance. They recently collapsed, and it could have a big effect on the economy.

The Role of SVB & CSB in the Tech Industry

Silicon Valley Bank specializes in serving the technology industry and provides banking services to numerous tech startups, venture capitalists, and private equity firms. It boasts an impressive client portfolio that includes Roku, Etsy, BuzzFeed, Roblux, and others. The bank’s expertise in the tech sector and its invaluable contribution to the success of many startups have earned it well-deserved recognition. Basically If it were to fail, it would have a major impact on startups and investors, potentially causing significant economic damage.

Credit Suisse Bank, a major player in the financial industry, provides banking services to individuals and businesses worldwide. The bank is renowned for its expertise in wealth management, investment banking, and asset management, among others.

Understanding the Ripple Effects

If Credit Suisse Bank fails, it could cause problems for the financial industry. People and businesses who have invested or saved money with the bank could lose it. This could make people lose trust in the financial system. The Swiss franc currency might also lose value, which could affect the global economy. And so they did but why? 

In the case of SVB, according to Federal Reserve Vice Chair of Supervision Michael Barr, “SVB failed because the bank’s management did not effectively manage its interest rate and liquidity risk, and the bank then suffered a devastating and unexpected run by its uninsured depositors in a period of less than 24 hours,”.  Such mismanagement can be seen in the report of CNN Business 

  1. Due to the rapid growth of the company which did not run parallel to the risk  management capacity and the bank’s compliance systems
  2. 97% of SVB’s deposits were uninsured 
  3. Lack of leadership in the appointment of the Chief Risk Officer (CRO), who “would have been able to spot the growing risk posed by the dwindling value of the bank’s long-dated bonds, which combined with its outsize deposit risk would merit a course correction.” 

According to reports from Reuters, Credit Suisse’s collapse is mainly due to investors losing trust and mismanagement. In February, the bank confirmed that clients had withdrawn $119 billion in the fourth quarter, coinciding with its largest annual loss since the financial crisis. Credit Suisse’s value has also dropped by over 75% in the past year, further damaging customer confidence as shares continue to decline.

The Importance of Financial Connectivity

The failure of large banks like Silicon Valley Bank or Credit Suisse Bank could potentially have a domino effect on other banks. Other banks are interconnected, meaning that the failure of one bank could potentially lead to the failure of others. This interconnectedness has the potential to create a systemic crisis in the financial system.

During the 2008 financial crisis, the failure of Lehman Brothers had a significant impact on the global financial system, leading to the failure of other banks and the global economy. In the event of a bank failure, governments often intervene to prevent a systemic crisis. Governments may provide financial support to the failing bank or take over the bank altogether.

Government intervention could have a positive impact by stabilizing the financial system and preventing a systemic crisis. However, it could also have a negative impact by increasing government debt and decreasing confidence in the financial system. 

Which is exactly what happened!

The FDIC predicts that Silicon Valley Bank’s collapse will need $20 billion from the Deposit Insurance Fund, with $18 billion covering uninsured deposits. Signature Bank’s failure expects to require approximately $2.5 billion, including $1.6 billion for uninsured deposits.

Presently, Flagstar Bank has acquired a significant portion of Signature Bank. Similarly, SVB was acquired by First Citizens Bank. FDIC Chair Martin Gruenberg and Treasury Under Secretary for Domestic Finance Nellie Liang testified about this situation to stabilize it and reassure confidence in the U.S. banking system, as reported by CBS.

Exploring the Long-Term Impacts

The failure of Silicon Valley Bank or Credit Suisse Bank could have negative consequences for the job market in the tech and finance industries, potentially impacting innovation and entrepreneurship. Investors would likely experience significant financial losses, leading to a decline in confidence and slower economic growth. The technology and finance sectors could suffer from a lack of innovative ideas, job opportunities, and economic expansion. Government intervention may be necessary to prevent a widespread crisis, although this could increase national debt and erode faith in the financial system.

It’s important to know about the financial industry and support more regulations to prevent future bank failures. Increased regulation can create a stable financial system and avoid crises in the future. By staying informed and taking action, we can contribute to a stable and prosperous economy for future generations.

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