Letters | Silicon Valley Bank collapse shows the need to learn from past mistakes

Readers discuss the loophole that fuelled SVB’s collapse, the ‘mountain’ of MTR fares, and platform gaps at train stations

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The unexpected collapse of Silicon Valley Bank has sparked renewed concern about the state of financial regulation. Photo: Reuters

Published: 11:30am, 3 Apr 2023

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The sudden collapse of Silicon Valley Bank (SVB) has drawn the world’s attention to risk oversight of financial institutions, and the need to enhance financial security and contingency plans. Some people have referred to the 2008 financial crisis, in which the collapse of several financial institutions generated a domino effect across multiple markets and industries and drove the world into recession.

In fact, the 2008 financial crisis serves as a cautionary tale about how important risk management is for financial institutions. Several major banks in the United States made significant investments in mortgage-backed securities when the property market prospered, exposing themselves to credit risk.

We now know subprime mortgages were a volcano waiting to erupt in the event of the housing bubble bursting, which could leave homeowners in a negative financial position. The disaster unfortunately struck, turning the mortgage-backed securities the banks held into worthless rubbish.

Today, it is interest rate risk, not the credit risk of mortgage-backed securities, that contributed to the collapse of SVB. Looking back at the bank’s investment history, SVB had successively invested in mortgage-backed securities, as the US Federal Reserve loosened policy during the pandemic and released liquidity.

Until December 2022, mortgage-backed securities had accounted for a large proportion of SVB’s investment portfolio. At the same time, the Fed’s aggressive interest rate increases drove down the value and extended the maturity of mortgage-backed securities. When SVB sought to realise the mortgage-backed securities, a tremendous capital loss occurred.