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Unraveling Silicon Valley Bank’s collapse – what happened? UNC professor explains
Yunzhi Hu, UNC Kenan-Flagler Business School assistant professor of finance, took a moment to answer some questions about why Silicon Valley Bank failed…
CHAPEL HILL – On March 10, the United States experienced the second-largest bank failure in its history with the collapse of Silicon Valley Bank. Founded in 1983, Silicon Valley Bank was the 16th-largest bank in the U.S. and a leading funding source for tech-centered and startup firms before its failure. This sudden downturn has prompted concerns about the health of the country’s financial system, as well as intense debate around what the bank’s insolvency will mean for entrepreneurship and the technology sector. Yunzhi Hu, UNC Kenan-Flagler Business School assistant professor of finance, took a moment to answer some questions about why the bank failed as well as possible ramifications.
What happened to Silicon Valley Bank?
Yunzhi Hu: Silicon Valley Bank (SVB) experienced a classic bank run scenario, whereby customers rush to withdraw their deposits. The run was triggered by a combination of at least two factors. First, SVB has a large fraction of its portfolio invested in bonds – in particular, long-term Treasury bonds and mortgage-backed securities. After multiple interest rate increases by the Federal Reserve, the market value of these bonds has fallen substantially. Second, most of SVB’s depositors are technology firms and startups, and their deposits are typically far more than $250,000, the amount covered by Federal Deposit Insurance Corp. (FDIC) insurance. So, when news that SVB sold a portfolio of bonds for about $21 billion at a $1.8 billion loss came out last week, these uninsured customers panicked and rushed to withdraw their deposits. SVB’s stock price dropped more than 60% on Thursday, March 9, and trading was eventually halted before the market opened March 10. SVB attempted to raise capital but failed.
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How much of this issue is specific to SVB and similar entities, or is this a leading indicator of broader financial distress?
Overall, if one looks at indicators such as capital levels and liquidity, the banking sector in the U.S. seems to be in good shape. It does not seem likely that this event can trigger a systemic event such as the next large-scale crisis. That said, it is always hard or even impossible to predict financial crisis.
How has the government acted to stop a broader financial crisis? Do you think it will be effective?
The government decided to insure all deposits rather than insuring just the standard FDIC maximum of $250,000. What are the consequences of that decision?
Given SVB’s relationship with the tech world, what are the consequences of its failure beyond the potential financial contagion?
(C) Kenan Institute for Private Enterprise
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