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Macroscope | SVB’s sudden collapse calls for more rigorous stress tests for banks
- The wider impact of the US Fed’s rate-raising campaign on bank-held investments is hogging headlines
- However, the question must be asked why regulators did not see Silicon Valley Bank’s demise coming
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The collapse of Silicon Valley Bank, the 16th-largest bank in the United States, underscores financial vulnerabilities as interest rates head steadily higher with the Federal Reserve’s determination to slash inflation by slowing the US economy.
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A bank that took 40 years to reach its pinnacle as a key player in the ecosystem for start-ups disappeared in 36 hours, becoming the largest bank failure since the global financial crisis in 2008. The speed of events and the magnitude of the demise raise questions about potential tremors crippling the banking sector worldwide.
That there were signs of inevitable trouble a year ago is fuelling concerns about the quality and rigour of oversight.
SVB’s failure is easily explained. The bank had taken in about US$209 billion in assets and US175.4 billion in cash by the end of 2022 because its hi-tech clients were awash in cash as the pandemic unleashed unprecedented demand for technology infrastructure, from bandwidth expansion to network equipment and cloud services.
SVB ploughed the windfall into long-term, fixed-rate government-backed securities and Treasuries. This made sense at the time, as the Fed signalled then that interest rates would continue to be suppressed.
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But in March 2022, Fed chairman Jerome Powell embarked on a vigorous campaign to rein in US inflation. The gap widened between what SVB paid to attract deposits and what it earned on interest.
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