The Real Reasons Why Silicon Valley Bank Collapsed

Silicon Valley Bank collapsed due to years of financial mismanagement.

By Ryan Clancy | Published

silicon valley bank

The untimely demise of Silicon Valley Bank shocked many people, and now the reason for the sudden closure has become apparent. They imploded at a rapid rate due to financial mismanagement and panic withdraws from its depositors and investors. 

This new information has been given in detail by a Federal Reserve official during a hearing this week. He explained how the Silicon Valley Bank had failed to acknowledge and subsequently manage its interest rate and liquidity risk. This mismanagement caused the bank to crumble within a few days. 

It was detailed that the Silicon Valley Bank was a textbook case of a series of transgressions with its top management. Its top management waited too long before taking action. 

When it was too late, the bank tried to balance their accounts, but it was too far gone. This scramble to save the bank caused depositors to rush and withdraw their money. The Silicon Valley Bank crashed shortly after the events, with experts saying the mass exodus of depositors was the last nail in its coffin. 

Depositors withdraw the astonishing amount of $42 billion from Silicon Valley Bank in one day alone. This panic was started by investors urging depositors, especially tech start-up companies, to withdraw any investments they had made in the bank. Social media also helped spread the message of panic. 

While the Federal Reserve employee was unforgiving about the Silicon Valley Bank’s mismanagement, he gave the American banking system various positive comments. He ensured the people of America that the banking system was not ready to crumble but sound, with plentiful capital and liquidity. 

The banking system is constantly under review, and the Federal Reserve is ready to use any tools at its disposal if there is an issue. While that is very comforting, it is concerning how the Federal Reserve missed that Silicon Valley Bank was in such trouble. 

The Federal Reserve has launched an investigation to uncover why staff who supervise and regulate the troubled bank did not notice such a big problem. He ensured this review would be thorough and transparent. 

But within his testimony, the Federal Reserve officials did disclose that in 2021, supervisors at Silicon Valley Bank had found shortcomings in their liquidity risk management, liquidity stress testing, and contingency funding. The following year, supervisors again found more issues as risk management and internal auditing oversights were flagged. These superiors are adamant that regulators knew of the problems at Silicon Valley bank. 

During the Federal review of the bank, they will concentrate on the 2018 rollback of Dodd-Frank and whether the more relaxed banking rules contributed to the untimely demise of the troubled bank. In the future, regulators must take a hardened stance on banks to ensure this will not happen again. 

Banking has changed over the last few years, and regulators need to understand the impact technology, social media, and customer behavior can have on financial institutions. Both top management and regulators knew Silicon Valley Bank was in trouble, but still, it slipped through the net and failed.