Government’s Reckless Monetary And Fiscal Policies Led To Silicon Valley Bank’s Failure

Silicon Valley Bank (SVB), 16th-largest U.S. bank, collapsed Last Friday was the second-largest U.S. bank failure after the Washington Mutual was dissolved in 2008. SVB’s failure to meet its obligations is not due to reckless lending, but rather to our government’s fiscal policy and monetary policies. 

SVB, headquartered in Santa Clara in California, was once Silicon Valley’s largest bank. Due to its geographic location, the bank’s most customers were both employees and entrepreneurs from tech startups. Because of the bank’s unique customer base the Federal Reserve’s interest rates policies were especially important to the bank’s recent booms and busts.

In response to the Covid-19 epidemic, three years ago the Federal Reserve reduced the interest rate to almost zero and inundated the U.S. with cheap money. As investors were willing and able to finance more risky ventures at low borrowing costs, tech startup companies flourished. Bloomberg, Matt Levine Explained These tech companies were able to raise capital in the stock exchange, so they didn’t have to borrow money from SVB. These companies instead put their new wealth into SVB. SVB’s deposits grew from $60 billion at the end of the first quarter 2020 to around $200 billion over the next two years. 

A problem can arise when you have too much cash. SVB couldn’t grow its loan portfolio fast enough and had few options to generate returns with its cash reserves in the zero interest environment. 

Although the bank could have invested its assets in cash or short-term bonds to meet customers’ withdrawal requirements, these options would not have provided a good return on investment and wouldn’t have made SVB shareholders happy. SVB’s customers were rich with cash, so there was no need for them to withdraw from SVB. SVB invested an enormous amount of its assets in U.S. Treasurys and government backed mortgage securities. These investments were safe and provided higher returns than short term bonds. SVB probably focused too much on long-term investments. But, this was not a bad thing.

However, the Biden administration launched numerous rounds of Covid relief and sent more money to the U.S. economy, despite the fact that it was not required by law. Warning Inflation risk The Federal Reserve first deemed them unacceptable as inflation rates began to rise in the U.S. “transitory.” In order to inject more money into the U.S. economic system, the Fed maintained the interest rate at zero for the first quarter 2022. It continued to purchase billions of dollars worth of bonds each month and kept it that way until the end of last spring. The Fed realized it had made a mistake when the U.S. inflation rates reached an all-time high of 4.2% at the end last spring and increased interest rates to control inflation. 

Forced to sell its bonds

This is a fact everyone needs to know about bond investing. Bonds have an inverted relationship with interest rates. Bond prices drop when interest rates rise because investors have the option to invest their money elsewhere and earn higher returns. SVB’s long term bond portfolios began to lose money on paper. SVB would have no losses if it could hold these bonds investments until maturity. The bank would also get its principal back and interest income. 

SVB’s customers were tech startups that couldn’t wait so long. Higher interest rates meant that they had to cope with higher borrowing costs, higher operating costs, and lower demand from customers who cut back on spending. Investors are less inclined to invest in high-risk investments when they can earn as low as 4 or 5 percent with short-term U.S. Treasury bonds. SVB’s customers began to withdraw their funds from SVB, as they couldn’t raise any money on the stock market. SVB was forced to sell some of its long-term bonds in order to meet withdrawal requests. This allowed the bank to turn its paper loss into an actual one. The bank, for instance, had to sell a portion of its long-term bonds last week in order to meet these withdrawal requests. “had sold a large chunk of its securities, worth $21 billion at the time of sale, at a loss of about $1.8 billion after tax,” According to The Wall Street Journal. 

Investors dumped SVB shares after learning about SVB’s bond loss and drove down share prices. SVB’s plans to raise capital via additional shares were a failure. SVB continued to receive deposits from tech companies, which unintentionally caused a typical bank run. 

According to the JournalSVB’s negative cash balance was close to $1B at the end last Thursday, when its customers attempted to withdraw $42B that day. The Federal Deposit Insurance Corporation (FDIC), which took over SVB at noon on Friday, transferred SVB’s assets and liabilities to the Deposit Insurance National Bank of Santa Clara. Many customers of SVB were concerned that they might suffer losses if their deposits exceed the $250,000 insurance limit of FDIC.

More extensive implications

SVB’s demise will undoubtedly have the biggest impact on the U.S. tech sector because many of the founders of start up companies had their money and those of their companies with SVB. Garry Tan, the president and CEO at Y Combinator (a Bay-area venture capital investor firm), summarized how SVB’s collapse would impact the sector in a succinct summary. Tweet: 

The depositors are the true victims of SVB’s fallout.
startups (10 to 100 employees) who cannot make payroll, and will have to shut down or furlough *next week*

If these startups wait weeks/months for their deposits, we have destroyed a generation of US startups, *at random* https://t.co/mLRQzag1VI

— Garry Tan 陈嘉兴 (@garrytan) March 10, 2023

U.S. Treasury Secretary Janet Yellen, Jerome Powell (Federal Reserve Board Chair) and Martin Gruenberg (FDIC Chairman) issued a calming statement to placate nervous depositors. Joint statement Sunday’s announcement by the Federal Reserve stated that SVB’s depositors would be able to access their money from Monday, and that U.S. taxpayers would not bear any losses related to the bank’s resolution. In addition, the Federal Reserve stated that it will “make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.”

Sen. Elizabeth Warren, D. Mass., was quick in responding accuse Republicans are pushing for “weak capital requirements at exactly the wrong time. Silicon Valley Bank’s collapse underscores the need for strong rules to protect the financial system.” SVB’s failure could not have been caused by her diagnosis. She also failed to offer a cure that would have prevented its downfall.

SVB fell because it had too many U.S.-backed bonds as a capital investment, believing they were safe investments. It became a victim to the government’s reckless fiscal and monetary policies. 

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Helen Raleigh, CFA is an American entrepreneur and writer. She is a Senior Contributor to The Federalist. Her writings are also published in The Wall Street Journal, Fox News, and other national media. Helen is also the author of “The Book That Changed My Life” and “The Best American Books”.Confucius Never Said” und “Backlash: How Communist China’s Aggression Has Backfired.” Follow her on Twitter and Parler: @HRaleighspeaks

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