Silicon Valley Bank Collapses, Shocking Economists and Triggering Economic Fears

Silicon Valley Bank Collapses, Shocking Economists and Triggering  Economic Fears

By Yehudit Garmaise

Silicon Valley Bank (SVB), a commercial bank headquartered in Santa Clara, California, collapsed on Friday, causing bank customers to swarm the building to withdraw their money amidst fear of losing their savings. 

While relatively unknown outside of northern California, SVB was among the top 20 commercial banks, with $209 billion in total assets that have now been put in control of the US Federal Deposit Insurance Corporation (FDIC), which in cases of insolvency, liquidates bank assets and pays back bank customers.

All insured SVB depositors will be able to access their insured deposits by Monday morning, said the FDIC on its website. It also said it would pay uninsured depositors "advanced dividends within the next week."

SVB's insolvency, or its inability to pay its debts, marks the largest shutdown of a US bank since 2008 when Washington Mutual fell during the financial crisis, CNN reported.

In 2008, low-interest credit and relaxed lending standards created artificially high real estate prices.

When those prices eventually came crashing down, banks were left holding trillions of dollars of worthless investments in borrowers with low credit ratings who could not make their mortgage payments.

Instead of lending to high-risk homebuyers, SVB was known for lending funds to big-name, high-risk tech startups, which have recently suffered from high-interest rates and investors' decreased enthusiasm.

"Unlike in 2008," a business school professor told BoroPark24, "when a great many banks gave mortgages that declined in value, SVB was one of the few banks that lent to tech startups, so SVB's shocking failure is not likely to create a domino effect of failures among other banks."

A loss of $2 billion has caused SVB to suffer "a capital crisis," which is when the value of a bank's assets sinks below lower the value of its liabilities.

In response to the crisis at SVB, bank stocks worldwide fell on Thursday, causing some financial experts to fear that other banks will also fail.

As of Friday morning, however, the panic appeared to have eased, as bank stocks remained largely down but stable.

Mike Mayo, Wells Fargo senior bank analyst, said the crisis at SVB may be an unusual situation.

"This is night and day versus the global financial crisis from 15 years ago," Mayo said on CNN. "[In 2008,] banks were taking excessive risks, and people thought everything was fine.

"Now everyone's concerned, but underneath the surface, the banks are more resilient than they've been in a generation."

Photo Credit: Flickr

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