Key takeaways:
- Silicon Valley Bank’s collapse was caused by its lending practice of providing loans to borrowers to buy or carry securities of their own.
- Analysts have raised questions about the risk management of the bank’s executives and board.
- The banking industry is now left to grapple with the consequences of these failures and the questions they have raised.
The banking industry has been rocked by the recent failures of Silicon Valley Bank and Signature Bank, as well as the ongoing issues at Credit Suisse. The causes of these failures have been varied, with Silicon Valley Bank’s collapse being particularly notable.
According to regulatory data, Silicon Valley Bank had roughly $74 billion in total loans on its books at the end of the year, with almost half of that money going to borrowers who used it to buy or carry securities of their own. This lending practice is believed to have contributed to the bank’s rapid failure, leading the Federal Deposit Insurance Corporation (FDIC) to take control of the bank last Friday.
The FDIC typically merges failing banks with healthier ones, but this has not been the case with Silicon Valley Bank. Analysts have raised questions about the risk management of the bank’s executives and board, and the full picture of why the bank failed so quickly has yet to come into focus.
US customers held at least $151.5 billion in uninsured deposits with Silicon Valley Bank at the end of 2022, according to the bank’s annual report. This means that many companies had more than the FDIC’s insured limit of $250,000 in their accounts.
The banking industry is now left to grapple with the consequences of these failures and the questions they have raised. It remains to be seen how the FDIC will respond to the situation and what measures will be taken to ensure that similar issues do not arise in the future.
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