Collapse of USA Silicon Valley Bank, a lesson for PPP on poor short-term management 

Mar 30, 2023 Letters

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Dear Editor,

Silicon Valley Bank (SVB), the main venture capital community and the USA’s 16^th largest bank experienced a sudden fall, and many are asking where the Federal Agency and California Banking Authorities was, as they had to notice the riskiness of this fall. On March 17, 2023 Santa Clara, California-based SVB Financial filed for Chapter 11 bankruptcy protection.

The assets and loans of collapsed US lender Silicon Valley Bank (SVB) were bought by rival First Citizens Bank and all of Silicon Valley Bank’s 17 branches opened on Monday March 27, as “Silicon Valley Bank, a division of First Citizens Bank.” First Citizens is based in Raleigh, North Carolina and calls itself America’s biggest family-controlled bank. It has been one of the largest buyers of troubled banks in recent years.

First Citizen bought around $72bn of SVB’s assets and loans at a discount of $16.5bn. (77% DISCOUNT). The FDIC will still hold about $90bn of SVB’s assets.  CASH is KING. First Citizens purchased all of SVB’s deposits and loans, as well as a large portion of its assets, leaving about $90 billion in securities and other assets under the control of the FDIC.

As SVB grew to be the 16th largest in America, SVB invested their funds in long-term bonds when rates were near zero, and when interest rates rose, those long-term bond prices fell, cratering their investments, that it suffered a $1.8 billion after-tax loss and urgently needed to raise more capital to address depositor concerns, as heavy withdrawals were being experienced. SVB failed because the bank did not protect itself from the risk of a reversal in market conditions linked to the upward move in interest rates. SVB had acquired Treasury bonds when interest rates were low. The problem is that the bank had not anticipated that interest rates would rise. When the Fed began boosting rates to fight inflation, the bank’s bond portfolio lost value. Bond prices and interest rates move inversely to each other.

SOCIAL MEDIA was a MAJOR factor which triggered the massive withdrawals, and news flashes caused panic which is the heart of SVB collapse. Scary social messages should be prosecuted but consideration for public interest in freedom of speech, to be respected. Banks should be trustworthy and its executives and managers to keep calm, continue, and avoid the collapse. However, it is now clear that the CEO was not up to the gargantuan task of doing, acting, and leading with transparency, integrity, and truthfulness. Most customers at SVB failed to watch, monitor, and check on their monies and bank financials, operations, and news alerts.

When a member FDIC bank fails, the FDIC steps in to protect deposits. The agency first attempts to complete the acquisition of the failed bank by another financial institution. If you have an account at a failed bank, the FDIC will cut you a check for the value of your insured deposits. The USA Government via Federal Deposit Insurance Corporation (FDIC) agreed to cover deposits at the federally insured limit of $250,000, and 99 % of SVB customers have many millions more than the $250,000 FDIC limit. Several lawmakers have since discussed raising the $250,000 limit or abolishing it altogether.

The mission of the Federal Deposit Insurance Corporation (FDIC) is to maintain stability and public confidence in the nation’s financial system. In support of this goal, the FDIC, an independent agency of the federal government was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. The FDIC receives no Congressional appropriations – it is funded by premiums that banks and savings associations pay for deposit insurance coverage. The FDIC insures trillions of dollars of deposits in U.S. banks and thrifts – deposits in every bank and savings association in the country. Tough annual Federal Reserve tests lenders, such as Wells Fargo and Citigroup, but in 2018, the Trump administration successfully championed a regulatory relief bill that greatly reduced the frequency and severity of the stress exams for regionals.

Paul Krugman has warned the banking chaos has increased the risk of a US recession. The Nobel Prize-winning economist advised the Fed to hold off on hiking interest rates again. Krugman cautioned that cutting rates could signal to investors that regulators are panicking.  On March 22, 2023, Federal Reserve raised interest rates by 0.25% to 5%. Most were expecting NO increase, due to fears of a downturn and recession which are very worrying to all Americans.  The Fed Vote of 11 Governors was unanimous. This increase is the 9^th. consecutive increase. The U.S., interest rates are determined by the Federal Open Market Committee (FOMC), which consists of seven governors of the Federal Reserve Board and five Federal Reserve Bank Presidents.

Sincerely,

Dr. Shamir Ally

Former Ambassador to Kuwait

Former FIRST Alternate Governor, Islamic Development Bank

Former Deputy Chairman GO-Invest

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• Dr. Shamir Ally, Federal Agency, Federal Open Market Committee, management, Silicon Valley Bank

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