Image courtesy of Minh Nguyen

Silicon Valley Bank: A pillar of startups comes crumbling down

By Andre Davancens, April 11, 2023

Interest rates are the highest they have been in months, Silicon Valley Bank collapses marking the biggest United States bank collapse since the 2008 recession.

For the past 40 years, Silicon Valley Bank stood as a beacon to startup companies, providing loans structured to support starting and growing businesses.

Silicon Valley Bank’s stock crashed March 9, driving the last nail in the coffin for the bank. The day after, federal regulators took control of the bank, marking its collapse.

“This is actually not a surprising outcome,” said Anthony Orlando, an associate professor of finance, real estate and law at Cal Poly Pomona. “Part of the reason why this happened is because the Federal Reserve was raising interest rates, which makes it harder for people to do business and that slows down the economy, which slows down inflation.”

The collapse of Silicon Valley Bank was a perfect storm. Silicon Valley Bank invests the money stored in the bank to build more capital which can be partially returned to its clients and be used to lend to other clients.

Prior to the collapse, the bank invested in the traditionally safe investment of federal bonds. As federal interest rates increased to fend off inflation, the value of these bonds rapidly decreased.

At the same time, the companies holding their money with Silicon Valley Bank started to withdraw money at an accelerated rate. To meet demand, Silicon Valley Bank needed to start selling these now low value bonds until it could no longer sustain this and collapsed.

“Silicon Valley Bank, despite it being a very large bank in the United States, is also a very specialized bank,” said Shu Shang, an assistant professor of business law at CPP. “An overwhelming majority of them are startup companies and they use Silicon Valley Bank as their payroll banks, meaning that now a lot of companies are freezing their payrolls and putting their employees on furlough.”

Image courtesy of Minh Nguyen

“If I’m a student and I’m trying to think about ‘what does this mean for me?’ the banking sector is going to be more cautious throughout the rest of the year,” said Orlando. “If I’m trying to get a loan, a student loan, if I want to buy a house at some point, if I want to get a car loan; the banking sector is going to be a lot more careful about giving out loans.”

While the collapse of a bank may sound alarming, the fall of Silicon Valley Bank marks a time for positive change and increased regulation of banks.

“Changes are already underway and its coming so quick,” said Shang. “We know that the DOJ and FDIC already started to look at the crisis from the fraud perspective. We’ve also seen that investors are already starting to file lawsuits based on claims such as insider trading, so that’s something that might help regulators to rein in executives in taking up high risk decisions.”

Despite the turbulence this crisis brought into the financial world, some see opportunity hidden through the rubble.

“As a student I think in the short term it’s scary,” said Nicholas Medina, a management, human resources and marketing student. “Coming out a post COVID era, our professor was letting us know that we have a short-term advantage in regards to a lack of students applying, and jobs to be filled. We have a lot more opportunities in the short term.”

In a time of economic uncertainty, the collapse of a bank is an omen. For students, it is relatively safe to say because of the niche nature of Silicon Valley Bank, they will remain largely unaffected.

“I don’t think that this crisis will have a significant effect on the student loan market,” said Orlando. “I think that’s separate and I don’t think that this materially affects the risks in that market. The thing you have to remember about student loans is that they’re paid off over the very long run … so their determination isn’t really based on anything that’s happening in the banking sector right now.”

Feature image courtesy of Minh Nguyen

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