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Why did the $212bn tech-lender Silicon Valley bank abruptly collapse?

The collapse of Silicon Valley Bank continues to reverberate, hitting bank stocks, revealing hidden stresses, knocking on to Credit Suisse, and setting off a political blame-game.

Why the $212bn tech-lender abruptly collapsed, triggering the most significant financial crisis since 2008, has no single answer. Was it, as some argue, the result of Trump-era regulation rollbacks, risk mismanagement at the bank, sharp interest rate rises after a decade of ultra-low borrowing costs, or perhaps a combination of all three?

Federal investigations have begun and lawsuits have been filed and no doubt new issues at the bank will emerge. But for now, here are the main reasons experts believed SVB failed.

Trump rollbacks

Vermont Senator Bernie Sanders argues that the culprit was an “absurd” 2018 law, supported by Congress and signed by Donald Trump, that undid some of the credit requirements imposed under the Dodd-Frank banking legislation brought in after the 2008 banking crisis.

Dodd-Frank required that banks with at least $50bn in assets – banks considered “systemically important” – undergo an annual Federal Reserve “stress test” and maintain certain levels of capital as well as plans for a living will if they failed.

SVB chief executive Greg Becker argued before Congress in 2015 that the $50bn threshold (SVB held $40bn at the time) was unnecessary and his bank, like other “mid-sized” or regional banks, “does not present systemic risks”.

Trump said the new bill went a “long way toward fixing” Dodd-Frank, which he called a “job-killer”. But the nonpartisan Congressional Budget Office (CBO) warned before the bill passed that raising the threshold would “increase the likelihood that a large financial firm with assets of between $100bn and $250bn would fail.” Joe Biden says he wants Trump’s roll-backs reversed.

SVB’s management

The bank didn’t have a chief risk officer (CRO) for some of 2022, a situation that’s now being looked at by the Federal Reserve, according to reports. SVB’s previous CRO, Laura Izurieta, left the company in October but stopped performing the role in April. Another was appointed in December.

Early SVB shareholder lawsuits are said to be looking at the key vacancy, especially as the board’s risk committee was meeting frequently before the bank collapsed.

“It means perhaps management was hiding something or didn’t want to disclose something, or had disagreements over the risks it was taking”, said Reed Kathrein, a lawyer specializing in shareholder lawsuits, to Bloomberg.

“This isn’t greed, necessarily, at the bank level,” said Danny Moses, an investor who predicted the 2008 financial crisis in the book and movie The Big Short. “It’s just bad risk management. It was complete and utter bad risk management on the part of SVB.”

SVB and Signature, the second mid-size bank to fail last week, have also been accused of prioritizing social justice over financial management. Republican house oversight committee chairman James Comer called SVB “one of the most woke banks”.

The narrative fed into a larger conflict over ESG, or environmental, social and corporate governance-driven investing, that has become a target of conservatives.

But the bank’s loans to community and environmental projects were not central to its collapse nor are its diversity, equity and inclusion (DEI) policies dissimilar to other banks. The argument also fails to take into account all the banks that existed in 2008, before DEI or “woke” became a part of corporate or political discourse.

Nevertheless Florida governor Ron DeSantis continued on that theme, telling Fox News, that SVB was “so concerned with DEI and politics and all kinds of stuff. I think that really diverted from them focusing on their core mission”.

Inflation and interest Rates

SVB had benefitted from from more than a decade of “zero money” interest rates as billions poured into the bank via tech venture capital. Looking for some kind of a return, it put the money into longterm US treasury bonds. But when interest rates started sharply rising last year, and depositors demanded higher returns, the bank was forced to sell some of those bonds at a loss. When news of that hit social media, tech investors panicked, triggering a classic bank run. From there, it took 36 hours for the second-biggest bank failure in US history to materialize.

Before the collapses, investors had been expecting the federal reserve to raise interest rates by a quarter or half a percentage point when the governors meet next week. Now central bankers are in a bind: continue raising rates to tame inflation still running at 6% and risk another break in the financial system, or continue tightening money supply.

The treasury secretary, Janet Yellen, gave a hint on Thursday when she told the senate finance committee that “more work needs to be done” on inflation.

What happens next?

Financial jitters eased on Thursday after Wall Street rode in to the rescue and propped up First Republic, another mid-sized bank whose customers were fleeing. But the respite may be brief.

Goldman Sachs has raised its prediction for a recession in the next year to 35%, partly as a result of lending drops by regional banks.

In the meantime it seems clear that investigators are likely to uncover more problems at the banks as their enquiries continue. Those revelations may trigger more concerns from depositors and investors.

On Thursday, Republican house financial services chairman Patrick McHenry said people should hold off on assigning blame for the collapse of SVB and Signature while Congress and watchdogs investigate.

“When people jump to these conclusions at this stage of the game – a week in on this really stressed moment for our banking system – it’s unhelpful and quite politically hackish,” McHenry told Bloomberg.

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