Explained | Silicon Valley Bank crisis: Did US central bank miss headwinds?

The financial regulators in the United States shut down Silicon Valley Bank in the biggest bank failure since the 2008 recession that turned most stock indices red across the world.

One of the crucial steps taken by the US Federal Deposit Insurance Corporation (FDIC) involved the creation of a National Bank of Santa Clara. This especially created financial institution involved feeding deposits and other assets of the failed Silicon Valley Bank. However, the abrupt closing impacted tech firms, the chief customers of the now collapsed bank. 

Large US banks have been injected with $30 billion in deposits into First Republic Bank, swooping in to rescue the lender caught up in a widening crisis triggered by the collapse of Silicon Valley Bank.

The ‘greed and avarice’ of Silicon Valley

However, despite its proactive response to the crisis, the United States Federal Reserve is facing the flak for the signs of high risk of collapsing that the Silicon Valley Bank was facing. 

However, many investors and analysts say that the SVB crisis is not an isolated incident, and its roots lie in a bigger systemic problem, they add.

“With regard to who’s to blame here, I think that the greed and avarice that has long been present in Silicon Valley has come home to roost,” Keith Fitz-Gerald, a trader, was quoted as saying by CNBC.

Questions raised on the US regulators

Analysts cited in the US media say that the regulators have been asleep at the wheel. This is because the Silicon Valley Bank relied heavily on corporate deposits and not much on retail and holding a large proportion of assets in loans and securities. This exact aspect of the Silicon Valley Bank’s functioning made it more prone to collapse. 

“I would submit that not only are they (the US Feds) complicit, they had a hand in designing this mess…SVB did what they needed to do, arguably, within the structure of rules that are the problem. So, to me, it’s the system that’s broken, or at least needs to be seriously reviewed here,” Keith Fitz-Gerald said.

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“I am personally flabbergasted that the system is what it is today and that this stuff was allowed to happen,” he said. “Where were the regulators? Where were the auditors? I think there’s going to be very serious questions asked about how the rating systems work. Why were these banks allowed to take on assets when they should have been backing their deposits?” Fitz-Gerald asked.

“That is a fundamental issue that has got to come to the forefront now. We can’t ignore it and kick the can down the road. I think it’s an embarrassment to the US Federal Reserve. I think it’s an embarrassment to the banking regulators, frankly.”

‘Stupid risks’ were at play

Investor Michael Burry attributed the Silicon Valley Bank’s collapse to what he called the ‘stupid risks’ taken by the ‘people full of hubris’. 

“2000, 2008, 2023, it is always the same,” Burry, who founded the hedge fund Scion Asset Management was quoted as saying. 

“People full of hubris and greed take stupid risks, and fail. Money is then printed. Because it works so well.”

The aftermath

Gold has witnessed early decline after US consumer price data came in line with expectations. The yellow metal is reportedly holding above the price of $1,900 an ounce after more than a five per cent surge over the previous three sessions, Bloomberg reported.

The oil prices rose from their lowest close in three months, with the West Texas Intermediate approaching $72 per barrel after losing seven per cent over the previous two sessions.

Global accounting firm KPMG said it stands behind its audits of Silicon Valley Bank and Signature Bank, the Financial Times reported.

The firm’s US boss Paul Knopp said that the audit work considered all the facts available at the time and that the market-driven events led to the banks’ failures.

The SVB has now filed for a court-supervised reorganisation under Chapter 11 bankruptcy protection while it continues to scramble to seek buyers for the assets it is left with. Before that as well the company had mentioned that they were planning to look at strategic alternatives for its businesses which included SVB Capital and SVB Securities. However, the two aforementioned holding companies’ funds and general partner entities are not a part of its reorganisation-related filing. 

Meanwhile, the White House is carefully monitoring developments at First Republic and other smaller banks after actions to protect the depositors following SVB’s collapse. This comes a day after

Moody’s Investors Service downgraded First Republic Bank and five other lenders, citing concerns over their reliance on uninsured deposit funding and losses in the asset portfolios.

(With inputs from agencies)


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