Lessons Learned from the Failure of Silicon Valley Bank and the Importance of Risk Management in the Technology Industry

Silicon Valley Bank (SVB) was one of the largest and most influential banks in the US, especially for the tech sector. It provided loans, banking services and venture capital to thousands of startups and established companies in Silicon Valley and beyond. However, on March 10th 2023, SVB collapsed after failing to raise enough capital to meet its obligations. It was the second-largest bank failure in US history, after Washington Mutual in 2008. What caused this spectacular downfall and what are the implications for the economy?

## The causes of SVB's failure

According to news reports , SVB's troubles began when it faced a series of lawsuits from borrowers who accused it of predatory lending practices, fraud and mismanagement. These lawsuits eroded SVB's reputation and triggered investigations by regulators. As a result, SVB's stock price plummeted by more than 80% in the past year.

At the same time, SVB was exposed to high-risk loans that were affected by the downturn in the tech sector. Many of its clients defaulted on their payments or went bankrupt due to increased competition, regulatory scrutiny and cyberattacks. SVB also suffered losses from its investments in cryptocurrencies, which experienced a massive crash in late 2022.

As SVB's financial situation deteriorated, it tried to raise more capital by selling some of its assets and issuing new shares. However, these efforts failed to attract enough investors who were wary of SVB's prospects. Moreover, some of SVB's creditors demanded early repayment of their loans or refused to extend new credit lines.

The final blow came when depositors started to withdraw their money from SVB en masse after rumors circulated about its imminent collapse . This created a bank run that drained SVB's liquidity and pushed it into insolvency. On March 10th 2023, California regulators closed down SVB and put it under the control of the Federal Deposit Insurance Corporation (FDIC), which will oversee its liquidation.

## The consequences of SVB's failure

SVB's failure has sent shockwaves across the financial system and the tech sector. The FDIC has assured depositors that their money is safe up to $250,000 per account, but many customers may face delays or difficulties in accessing their funds. The FDIC will also try to sell off SVB's assets and recover as much as possible from its creditors.

However, many other stakeholders will suffer losses from SVB's collapse. These include:

- Shareholders: They will likely lose most or all of their investment as SVB's stock becomes worthless.

- Employees: They will lose their jobs as SVB shuts down its operations.

- Borrowers: They will have to find alternative sources of financing or face defaulting on their loans.

- Investors: They will lose money from their stakes in companies that relied on SVB for funding or banking services.

- Suppliers: They will lose business from companies that depended on SVB for payments or transactions.

- Taxpayers: They may have to bear some of the costs of bailing out or resolving SVB.

SVB's failure also has broader implications for the economy as a whole. It could undermine confidence in other banks that are exposed to similar risks or operate in similar markets as SVB. It could also hamper innovation and growth in the tech sector by reducing access to capital and disrupting business relationships . Moreover, it could trigger contagion effects that could spread across other sectors and regions.

## Is a financial crisis next?

The collapse of SVB is undoubtedly a major blow for the US economy, but it does not necessarily mean that a financial crisis is imminent. Unlike Washington Mutual in 2008, which was part of a wider subprime mortgage crisis that affected many banks at once, SVB's failure seems more isolated and specific to its own problems.

Moreover, since 2008, regulators have implemented reforms that aim to make banks safer and more resilient against shocks. These include higher capital requirements, stress tests

and resolution plans that allow authorities to intervene before banks fail catastrophically.