Explaining how the Silicon Valley caused a series of bank collapses
Matthew Hillier, Staff Writer
Early in March 2023, Three banks (Silicon Valley Bank, Signature Bank and Silvergate) collapsed one after another. These collapses have set a precedent as there hasn’t been a bank failure of this magnitude since the 2008 Great Recession. According to the Washington Post, It is now being valued as the second-biggest bank failure in U.S history.
While that financial crisis was fueled and caused by a massive housing bubble these banks’ downfalls can be attributed to something completely different, tech start-ups.
Despite the American banking system being regulated by government anti-inflation regulations and the Federal Reserve system, these three banks failed regardless.
So how did tech start-ups cause the second biggest failure in U.S. banking history? This time, there was a healthy mix of old and new reasons behind these failures.
First, According to NBC ,Silicon Valley Bank had lax oversight of banking regulations and investors were ignoring several red flags. This led to a lack of capital, which then led to clients withdrawing their money and the bank failing.
To put it simply, tech start-ups are very high-risk, high-reward investments. Often these companies take years and years to become profitable and need more and more money. Venture capitalists love these investments as they have turned out some very highly profitable winners in the past decade such as Netflix, Uber, People.ai and more.
However, as inflation has risen the government has raised interest rates, thus the value of the bank’s bonds has gone down. This means that the bank’s value (which is already precarious due to its investment strategy) dropped in value significantly. This coupled with a lack of uninsured deposits caused the banks and a good old-fashioned bank run caused it to crash.
The other two banks however are a victim of another Silicon Valley Menace, cryptocurrency.
Truthout reports that Signature Bank and Silver Gate are some of the most crypto-friendly banks in the world. Silvergate especially seems to have bet the farm completely on cryptocurrency, leaving its traditional money-making methods in the rearview. A recent crypto crash ensured these banks’ failure long ago but the Silicon Crash seemed to have put the final nail in the coffin for these banks.
CNN states that “The bank’s shares have cratered 98 per cent from their November 2021 high. In the same period, the global crypto industry has lost two-thirds of its value, falling from a $3 trillion market cap to $1 trillion.”
This is a significant capstone in the evolution of cryptocurrency as the first crypto-based banks have failed. Coupled with the recent crash and its use for purchases in black and grey markets across the world, it’s unlikely crypto will ever see traditional banks invest on this scale ever again.
These three banks’ failures have led to speculation about an overall bank failure in the states. However, a failure on that scale can only be caused by one factor and one factor alone — U.S. citizens themselves.
According to Economics Observatory, U.S. banks are extremely susceptible to bank runs; this has led to massive regulation on how much money clients can withdraw at one time. However, this has done little to curb this constant threat. Due to the investment style of these banks, they often have very little of their total value on hand and in tangible metrics. Thus when there is a run on banks, their only value remains in intangible assets that take a long time to turn into cold hard cash.
While it’s doubtful this crash has the potential to snowball into a full-blown recession like the one in 2008, these three tech banks’ failure says a lot about both the current state of Silicon Valley tech and the American banking industry.