The Collapse of Silicon Valley Bank 1

Analyzing the Collapse of Silicon Valley Bank

Christian James Farlin

The University of Arizona

Author Note

christianjfarlin@arizona.edu
The Collapse of Silicon Valley Bank 2

Abstract

Banks are the heart of capitalism because they transfer money to and from investors, creditors,

shareholders, and governments to facilitate growth and innovation. The California-based Silicon

Valley Bank, the 16th largest bank in the United States, is one such heart (Gobler 2023). Silicon

Valley Bank primarily held low-risk, long-term debts—which caused customers and regulators

to believe that it would be insulated from the constantly-shifting economy. Additionally, any

stakeholder concerns were smoothed over by an impressive $209 billion in assets and the belief

that Silicon Valley Bank’s longstanding success translated to future stability. Silicon Valley

Bank also experienced rapid growth during the COVID-19 pandemic—a promising statistic

given the fact that most businesses halted operations or collapsed entirely. However, in the span

of just 8 days, Silicon Valley Bank fell from grace and filed bankruptcy. Silicon Valley Bank is

“the largest bank to fail since Washington Mutual closed its doors amid the financial crisis of

2008” (Gobler 2023), which reveals deeply rooted issues that impact many stakeholders and

raises significant economical, legal, and ethical questions.

Keywords: Silicon Valley Bank; Stakeholders; Economics; Laws; Ethics.

The Collapse of Silicon Valley Bank 3

Analyzing the Collapse of Silicon Valley Bank

Stakeholder Interests

The stakeholders that were the most harmed were stockholders. One glaring cause of the

collapse of Silicon Valley Bank is their lack of asset diversification. Most of the deposited funds

were used to buy low-risk Treasury bonds and other long-term debts. Although they generated

relatively low returns, they were believed to be safe investments (Gobler 2023). However, the

Federal Reserve had to increase interest rates to curb high inflation—which makes it harder for

new shareholders to purchase shares of the firm and for existing shareholders to sell their

existing shares to interested buyers. Therefore, the higher interest rates mandated by “the Fed”

harmed the Federal Reserve’s stock assets in a second way: customers viewed the now highly

priced stock as risky investments that were less likely to generate a lower return on investment

due to the unwaveringly high inflation rate.

Many stockholders sold their stocks before their value plummeted further. The remaining

stockholders were also negatively impacted by Silicon Valley Bank’s implosion because, out of

the firm’s total net worth of $16 billion, “$15 billion has already been lost during the crisis”

(Prachi 2023). The remaining $1 billion will likely be issued to creditors and to settle lawsuits—

and the remaining stockholders’ loyalty was rewarded with no dividends.

Another key stakeholder segment that was negatively impacted by Silicon Valley Bank’s

investment decisions were their clients. The clients, or the depositors, are the figurative blood

that keeps banks’ hearts alive. A bank cannot lend money if they do not have funds deposited by

their clients. However, the clients were saved by the Federal Deposit Insurance Commission and

the Federal Reserve, who bypassed their insured deposit limit of $250,000 because many clients

were tech startups—and thus had accumulated bank deposits that exceeded the $250,000 limit.
The Collapse of Silicon Valley Bank 4

By asserting “that the depositors will be able to access all their money whether insured or

uninsured” (Prachi 2023), the federal entities ensured that “the interests of depositors are not

compromised in any manner whatsoever” (Prachi 2023). However, a key caveat is that the FDIC

covered the SVB losses by using funds generated from quarterly premiums that all insured banks

pay to the agency. Since the FDIC depleted approximately $20 billion from their Deposit

Insurance Fund to cover the cost of SVB failing, they will likely charge higher premiums to

clients in the future to recoup some costs. Banks will attempt to share new FDIC costs with

clients by “charging [them] a higher interest rate or pay [them] lower percentage[s] of interest”

in savings accounts (Gobler 2023). Therefore, the collapse of SVB harms clients in the present

and in the future.

Economic Outcomes

A unique aspect about the banking industry is that the actions of one bank reverberate

across the entire industry. One key reason why this occurs is that customers view all banks as the

same entity. If a customer loses trust in a bank, “the credibility of the entire American banking

system has been brought into question” (Prachi 2023) because the federal government prevents

banks from collapsing en masse. If scores of banks closed, it would cause a Great Depression-

esque mass deposit removal phenomenon that would leave banks without the necessary funds to

lend to investing entities. Therefore, the collapse of Silicon Valley Bank has the potential to

severely damage the entirety of the United States’ economy if unchecked because the domino

effect of closing banks would cripple investing, stymy economic growth at the macroeconomic

and microeconomic levels, and halt the increases in Gross Domestic Product that are needed to

sustain a prosperous nation.

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Additionally, the collapse of Silicon Valley Bank affects one of the most innovative

industries: the tech industry. Approximately “44% of the venture-backed technology and health

care initial public offerings (IPOs) in 2022 were clients of Silicon Valley Bank (Gobler 2023), so

the collapse of Silicon Valley Bank jeopardizes the ability for many startups to make the

transition from a private to a publicly owned company—which would harm a broad swath of

sectors and customers that would benefit from the product.

In the midst of the Fourth Industrial Revolution, having technological advancements

plateau could set the United States years behind rival nations like China. The collapse of Silicon

Valley Bank—which had relationships with many foreign banks, firms, and clients—also

negatively impacts the United States’ global reputation and “has led to a loss of confidence in the

United States' ability to maintain its position as a leader in technology and finance” (Barron

2023).

Legal Requirements

Many key pieces of legislation were enacted after the 2008 Great Recession in the hopes

of preventing another widespread economic panic. One key law is the Dodd-Frank Act of 2008,

which placed heightened oversight measures over key firms deemed too essential to the U.S.

economy to fail. One original provision of the Dodd-Frank Act was that “banks with more than

$50 billion in assets would be subject to additional oversight and rules” (Gobler 2023), as the

size and scale of operations of these banks transcended many industries and would consequently

cripple operations if they declared bankruptcy. However, President Trump’s 2018 Economic

Growth, Regulatory Relief, and Consumer Protection Act increased the $50 billion threshold to

$250 billion after successful lobbying by Silicon Valley Bank amongst others. The purpose of

this change was to ease regulations on major banks due to their perceived stability. One aspect
The Collapse of Silicon Valley Bank 6

that neither law considered was the financial stability of each bank. A bank could hold $20

billion in assets and inch toward bankruptcy, whereas a bank with $100 billion in assets could

consistently flourish. However, it allowed exponentially growing firms like Silicon Valley Bank

to expand quickly and unevenly by screening uninsured depositors, investing in broad portfolios,

and not preparing for issues that arise through hiring and maintaining teams of risk management.

Shortly before Silicon Valley Bank folded, they possessed at least $209 billion of assets as of

December 2022 (Burns 2023). If the original Dobbs Act was upheld, then Silicon Valley Bank

would have been subject to additional regulations, broken up by the Financial Stability Oversight

Council due to systemic risk, or forced to convert most of their assets into cash holdings. Since

the lack of diversification crippled Silicon Valley Bank’s asset value in 2023, this forced

diversification may have prevented bankruptcy. Therefore, one key factor that led to the

complete and total collapse of one of the largest banks in The United States was the reduction of

oversight parameters in the Economic Growth, Regulatory Relief, and Consumer Protection

Acts.

Ethical Duties

Another cause contributing to Silicon Valley Bank’s collapse is its abandonment of its

ethical duties. A key ethical tenet that all firms should follow is responsibility, as it is both a

belief in being accountable for one’s actions as well as a moral standard of behavior. However,

Silicon Valley Bank executives exhibited symptoms of “moral hazard”, where they were “less

careful because they[knew] that the consequences of their action [were] going to be insured [and]

they [were] not going to bear the cost themselves” (Levin 2023). The C-Suite believed that their

growing treasury stock devaluation problem would be resolved by a federal bailout because

federal agencies saved banks during the Great Recession. An entity whose actions affect the
The Collapse of Silicon Valley Bank 7

economy of an entire nation—which creates shockwaves that affect foreign investors and thus

foreign nations and markets as well—cannot shirk responsibility for their lack of asset

diversification. Once they noticed the devaluation of treasury stocks, they should have sold them

at a relatively small loss and used the received funds to establish a broad investment portfolio.

Instead, Silicon Valley Bank placed the stability of their firm on two “legs”: “$175 billion in

deposits with deep ties to tech” (Levin 2023) and $117 billion in treasury securities. This

systemic irresponsibility within the firm caused its downfall—especially given the fact that they

noticed and ignored a critical issue.

Additionally, all firms are obligated to consider the well-being of its employees—key

stakeholders that keep the firms operational. One key aspect of employee well-being is keeping

company stock share values high. Many firms issue out its shares to employees in place of

bonuses, and employees are incentivized to invest in the company and purchase stocks under the

impression that they could later sell the stock and receive enough funds to significantly

contribute to retirement plans. If a firm concludes that it will go under, then they are ethically

inclined to disclose those details to its employees—so employees can sell their shares and

receive a beneficial return on investment before stock values plummet. However, fewer than two

weeks before Silicon Valley Bank filed for bankruptcy, “top executives at the company sold

stock totaling several million dollars” (Dukakis 2023). However, CEO Greg Becker, who sold

$3.6 million of his Silicon Valley bank shares well before bankruptcy, “sent a message to his

employees acknowledging the ‘incredibly difficult’ 48 hours leading up to its collapse on

Friday” (LiveMint 2023). Thus, top executives had weeks to shed their eventually burdensome

stock shares for profit yet informed their employees only 48 hours before they declared

bankruptcy. I purport that ethical firms must strive to protect their employees, as they are the
The Collapse of Silicon Valley Bank 8

“cogs” that keep the business “machine” moving. The unethical and irresponsible actions

conducted by Silicon Valley Bank negatively impacted their stakeholders, their industry, and

their nation while violating Securities and Exchange Commission (SEC) and Federal Deposit

Insurance Corporation (FDIC) provisions.

Recommendation

The death of Silicon Valley Bank must be a signal to the rest of the banking industry of

how irresponsible and unethical decisions, coupled with lax regulation, can raze major banks in

days and potentially send the United States into a Great Depression-esque “run to the banks”

scare. Banks oppose “limiting” federal regulations and invest significant funding into lobbying

groups and anti-regulation political campaigns to loosen regulations. Banks successfully lobbied

Members of Congress into loosening provisions of the 2008 Dodd Act due to claims that its

provisions—such as high reserve rates— created a market “with banks unable to play the part of

a market maker, [so that] prospective buyers would likely have a harder time finding

counteracting sellers” (Hayes 2023). Ironically, the provisions that the banks rallied against may

have prevented the collapse of the security-heavy Silicon Valley Bank because they prohibited

banks from having a majority of its assets consist of constantly changing in value stocks. I

recommend that Congress passes stricter federal banking oversight legislation to prevent another

bank collapse on the same magnitude as Silicon Valley Bank. I also recommend that large banks

embrace new regulations—as any minor restriction that a regulation may include may prevent

them from investing poorly and narrowly. Although Silicon Valley Bank itself can never take

next steps and remediate these issues, it serves as a key example of why federal regulations are

essential in key industries that nations rely on for stability and growth.
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References

Dukakis, A. (2023). “SBV execs sold millions of their company stock in lead up to

collapse, federal disclosures show”. ABCNews.go.com. Retrieved from

https://abcnews.go.com/Business/svb-execs-sold-millions-company-stock-lead-

collapse/story?id=97937058#:~:text=Less%20than%20two%20weeks%20before,

disclosures%20obtained%20by%20ABC%20News.

Gobler, E. (2023). “What happened to Silicon Valley Bank?”. Investopedia.com.

Retrieved from https://www.investopedia.com/what-happened-to-silicon-valley-

bank-7368676.

Hayes, A. (2023). “Dodd-Frank Act: What it does, major components, criticisms”.

Investopedia.com. Retrieved from https://www.investopedia.com/terms/d/dodd-

frank-financial-regulatory-reform-bill.asp.

Juneja, P. (2023). “How does the failure of Silicon Valley Bank affect stakeholders”.

Managementstudyguide.com. Retrieved from

https://www.managementstudyguide.com/how-does-the-failure-of-silicon-valley-

bank-affect-stakeholders.htm.

Levin, M. (2023). “What is ‘moral hazard’, and why does Silicon Valley Bank have us

talking about it again?”. Marketplace.org. Retrieved from

https://www.marketplace.org/2023/03/16/moral-hazard-silicon-valley-bank/.

Michael, B. (2023). “Effects of the Silicon Valley Bank collapse”. globalEDGE.msu.edu.

Retrieved from https://globaledge.msu.edu/blog/post/57251/effects-of-the-silicon-

valley-bank-colla.