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The Collapse of the Silicon Valley Bank and Credit Suisse

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The Collapse of the Silicon Valley Bank

The 2008 financial crisis was one of the worst that the US witnessed in almost a century

since the great depression. The government made amendments to the banking system to prevent

such a crisis from occurring in the future but in March 2023, a bank that had been operating for

almost four decades collapsed within 48 hours (UW School of Law, 2023). Silicon Valley Bank

(SBV) was the second largest bank failure following the 2008 Washington Mutual failure. SBV

was too huge to fall but numerous reasons led to the fall of the bank. One of the most common

reasons for bank collapse in all financial crises is panic from customers, when they learn the

bank is unstable or on the brink of collapsing, they rush to make withdrawals. Most banks do not

hold money in cash, they either purchase bonds or lend money to generate interest which is the

profit for the banks. Just like many other banks, SVB had bought government bonds to a near

zero interest but as the Federal Reserve hiked the interest rates to reduce inflation, the prices of

the US government bonds fell which also meant people were borrowing at high rates. Since SBV

was more focused on tech startups, its customers tried to beat the interest rates by paying off

their debts. The startups were unable to raise their capital and they had only one option, to

withdraw their deposits at SVB to sustain their operations.

According to CNN, the last 48 hours before the bank collapsed were filled with panic and

customers flocked to the bank to make withdrawals. Although the bank's failure runs back 10

years ago in 2013 when the bank bought government bonds at near-zero interest rates, the hike in

interest rates to curb inflation led to the high cost of lending meaning the tech startups who were

the main customers of the bank had to turn to their deposits for their operations (Ziady, 2023).

Before its collapse, the bank announced that it sold its securities at a loss and would sell over

$2.25 billion of its new shares to cover the financial burden it was facing. This announcement
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sparked panic among its customers and many customers ran to make withdrawals and the bank’s

stock dropped by 60%, this did not only affect the bank but other banks also as their shares

dropped due to fear of the 2008 financial crisis. As the crisis loomed, the bank was shut down by

the California regulators and put under receivership.

Despite the new regulations, the SVB collapsed and almost sent panic to the customers in

other banks. However, the depositors and investors were guaranteed their money to prevent other

customers from panic withdrawals in other banks and also help the tech companies that were

banking with SVB bank to continue their operations by remaining afloat. Many people have a lot

of questions to ask but the biggest question is, was the bank responsible for the failure due to

poor financial decisions or the hike in interest rates by the Federal Reserve are to blame? The

answer to this question may not yield a concrete answer but while other banks managed to

navigate the hike, SVB could not because of the nature of its clients. Several issues came out

after the collapse of the SVB.

i. The banking system still has weaknesses and the government regulations after the

2008 bank crisis did not cover all the loopholes to avoid such occurrence. For

instance, the regulators do not oversight banks with assets below $250 billion.

ii. There is a lack of accountability among policymakers which has led to a need to

establish independent policy regulators.

iii. Leadership failure was another important factor. The SVB did not have a crucial

personnel, risk management officer, and the “what if” scenario was missing hence

the reason the bank did not hedge in the event of a hike in interests.
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The risk of economic disruption loomed as SVB collapsed, with several institutions to blame, a

financial crisis was evaded by a whisker. Nonetheless, what are some of the reasons for the

things that can be done to avoid future incidences?

1. Diversification. SVB was conducting most of its business with tech startups and other

emerging businesses, according to UW School of Law (2023) by the end of 2022, the

bank was ranked 16th in the US. The bank had not diversified in other bank operations as

it focused on serving these companies some of which were not-profitable companies

relying on venture capital. If the regulators had advised the bank to diversify its opinion,

the crisis would have been avoided and the government should ensure that does not

happen in the future by ensuring banks do not put all their eggs in one basket.

2. Liquidity and cash management. SBV did not have visibility of their liquidity and they

did not investigate the risk of investing in bonds to come up with countermeasures in the

event the interest rates rise. Some countermeasures such as hedging would have

prevented the crisis from happening.

3. Gaining customer’s confidence. One of the most underrated factors in this occurrence is

the lack of confidence from the customers and shareholders. If the bank had won the

confidence of its customers and shareholders, it would have remained still and allowed

the company to source money from investments. However, lack of confidence led to

panic which almost cost other banks

The fall of the Credit Suisse Bank

The collapse of the Credit Suisse Bank one of the largest financial institutions in Switzerland

and listed among thirty groups of banks that were globally known to be systematically

important. According to Reuters, the problem with Credit Suisse begun in 2021 began in
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2021 after the collapse of Greensill Capital and Archegos which triggered a pretax loss of

over $1 billion for the bank (Daga, 2023). After the incident, the CEO of the bank and the

chief risk and compliance officers left since the investigations showed that the bank failed to

manage risk effectively. In the months following, the chairman also resigned from the bank’s

board, and by late 2022, there were rumors that the bank was on the brink of failure. This

news sparked panic among its customers and it withdrew over $119 billion in the last quarter

of the year. Like SBV, the bank was facing a risk of its stock plummeting and sought to

borrow funds to increase its liquidity but its main financier, the Saudi National Bank refused

to bail the bank out citing regulatory barriers. Thus, the following events played a key role in

the collapse of the bank:

a. The 2019/2020 spying scandal led to the resignation of its then-CEO (Daga, 2023).

b. The collapse of Greensill and Archegos capital led to losses amounting to over $1

billion.

c. Resignation of the bank's chairman after he was accused of breaking COVID-19

regulations.

d. Rumors about the looming failure of the bank in late 2022.

e. Failure to secure credit from the Saudi National Bank in early 2023.

f. The collapse of SVB and Signature Bank which caused panic in the global financial

system.

g. In March 2023, the regulatory authorities in Switzerland allowed the takeover of the

bank by UBS.

Just like SBV, the collapse of Credit Suisse left its employees in uncertainty because the

receiver UBS could only absorb some of them while shuttering or lying off the rest. The
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aftermath of the collapse led central banks to seek measures that would allow banks to access

credit when they are in dire need. The collapse of Credit Suisse had a significant impact on the

country which is known to have a stable banking system. Nonetheless, the government and

regulatory authorities failed to prevent the crisis from happening by not setting these measures

after the 2008 financial crisis. The following measures are important to prevent a similar

situation from happening in the future;

1. Winning the backing of strategic investors. The bank could have shown

confidence to its investors by counting on firms such as the Qatar Investment

Authority for cautionary actions.

2. Ability to provide liquidity. Like in the case of SVB, Credit Suisse failed to

provide liquidity to its customers which would have helped the bank avoid crisis

during the panic withdrawals.

3. Effective regulation of Banks. The Swiss regulatory failed in its mandate to

supervise the bank over the last five years leading to its collapse. The regulatory

boards should be held accountable for future occurrences to ensure they are

responsible in their mandate.

4. The bank was received by UBS without their approval, if they had merged at the

beginning of the crisis, the collapse would not have happened. In the future, it is

important to advise banks to merge even with their close competitors when their

existence is in doubt.

The saying goes, “failing to prepare is preparing to fail” and for both Credit Suisse and

SVB, a chain of poor decisions in the last decade before their collapse was the main cause of

their failure. The 2008 financial crisis was a wake-up to government regulatory agencies and
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failure to control the collapse of these two banks shows there are still loopholes in the regulatory

system. Therefore, the regulators should use the insights from the collapse of the two banks to

implement policies that will prevent future crises. As the banking industry navigates through

these two incidents, it is evident that much needs to be done in the financial market to avoid

future crises.
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References

Daga, A. (2023) What happened at Credit Suisse and how did it reach crisis point? Available at:

https://www.reuters.com/business/finance/credit-suisse-how-did-it-get-crisis-point-2023-

03-16/ (Accessed: 13 February 2024).

UW School of Law (2023) The Silicon Valley Bank collapse explained, UW School of Law.

Available at: https://www.law.uw.edu/news-events/news/2023/svb-collapse (Accessed:

13 February 2024).

Ziady, H. (2023) Why Silicon Valley Bank collapsed and what it could mean | CNN ... Available

at: https://www.cnn.com/2023/03/13/investing/silicon-valley-bank-collapse-explained/

index.html (Accessed: 13 February 2024).