Paradox of Silicon Valley Bank: Forbes ranking of the best banks and internal collapse at the same time

Silicon Valley Bank (SVB) recently celebrated making Forbes magazine’s annual ranking of the Best Banks in America. In a tweet on Monday, the bank expressed its pride in being on the Forbes list for the fifth year in a row and being named to the publication’s first Financial All-Stars list.

However, five days later, the bank’s tweet became a bitter irony when regulators took control of the bank due to its inability to meet withdrawal demands from depositors.

proud to be on @ forbes‘ has also been named to the annual ranking of America’s Best Banks for the 5th consecutive year and to the publication’s inaugural Financial All-Stars list.

, https://t.co/rEmfOSTT4fpic.twitter.com/NFWlPJUBh5

— SVB (@SVB_Financial) March 6, 2023

The collapse of Silicon Valley Bank was the largest bank failure since Washington Mutual in 2008 and the second largest in US history. The bank’s inability to meet withdrawal demands caused a run on the bank, which prompted the California Department of Financial Security and Innovation (DFPI) to take over the bank’s operations after the bankruptcy. The bank’s assets have since been turned over to the Federal Deposit Insurance Corporation (FDIC), which will begin returning insured deposits of Silicon Valley Bank customers on Monday.

Prior to the shutdown, the Silicon Valley bank was the nation’s 16th largest lender. The bank’s collapse has sent shockwaves through the tech industry, as it was a major financier of tech startups. Hundreds of companies were affected by the shutdown, including retailer Camp and coffee company Compass Coffee, which say they have been unable to access their deposits.

As the Federal Reserve raised interest rates, bond prices fell, reducing the market value of the Silicon Valley bank’s portfolio. bloomberg news The Silicon Valley bank was reported to have “mark-to-market losses of more than $15 billion at the end of 2022 for securities held to maturity.”

Experts say the bank’s collapse appears to be a management failure rather than a sign of larger problems in the financial services industry. Higher interest rates, declining tech stocks, and industry layoffs each squeezed the bank, which had wrapped most of its deposits in long-dated Treasury bonds.

Doug Holtz-Eakin, a former Congressional Budget Office director who also served on the Financial Crisis Inquiry Commission that studied the 2008 global economic crisis, blamed bank executives for poor decision-making. They said that Silicon Valley Bank It had poor management of Tier 1 capital, was heavily concentrated in one asset, and had a narrow customer base, consisting only of tech companies in Silicon Valley. This resulted in a failure of the business model rather than a failure of the financial system.

The wave of bank failure has been felt around the world. For example, Israeli Prime Minister Benjamin Netanyahu warned on Saturday that the implosion of Silicon Valley Bank has triggered a deep crisis in the technology industry. Israel’s prime minister tweeted, “I am closely monitoring the collapse of the US investment bank, Silicon Valley Bank, which has caused a major crisis in the high-tech world.” “If necessary, out of responsibility to Israeli high-tech companies and employees, we will take steps to assist Israeli companies, whose center of activity is in Israel, to face the cash-flow crisis that has created for them Turmoil,” he said.

The Silicon Valley bank is the first FDIC-insured institution to fail this year. The last FDIC-insured institution to close was Alamena State Bank, Alamena, Kansas, on October 23, 2020.