Silicon Valley Bank’s Failure Could Devastate America’s Banking System

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The federal government bailed out Silicon Valley Bank, one of the largest technology and innovation-focused banks in the United States, in March 2023. According to experts, if the bank had not been rescued, it could have wreaked havoc on the banking system and the economy as a whole. According to a study conducted by economists from Stanford, USC, Columbia, and Northwestern universities, many small businesses and communities may have been affected by the bank’s failure, as it was susceptible to a sudden increase in interest rates. As a consequence of Fed interest rate hikes, the financial positions of many banks had deteriorated. The study demonstrates that even a modest assault on weak banks could effectively stifle the credit access of entire communities. Analysts warn that regulators have not permanently addressed the banking system’s vulnerabilities, leaving some of the nation’s most economically disadvantaged regions vulnerable to banking disruptions.

Silicon Valley Bank Failure

Some legislators and investors have criticised the federal government’s rescue of Silicon Valley Bank. The rescue enabled large corporations such as Roku, which retained all of their funds at the bank, to be completely protected despite the bank’s failure. According to critics, the government effectively encouraged both bank managers and depositors to engage in reckless behaviour. The measures permitted depositors to access all of their funds after the collapse of the banks, even if their accounts exceeded the $250,000 federally insured deposit limit. In addition, Fed officials announced they would provide alluring loans to banks that required assistance meeting depositors’ demands.

The Risks to the Banking System

Analysts warn that despite these actions, regulators have not permanently addressed the banking system’s vulnerabilities. These risks leave some of the nation’s most economically disadvantaged counties vulnerable to banking shocks ranging from a pullback in small-business lending, which may already be occurring, to a new depositor run that could effectively cut off easy access to credit for individuals and businesses in counties across the country. The data does not account for the steps taken by smaller banks in recent weeks to reduce their exposure to rising interest rates. The researchers observe, however, that smaller and regional banks face new risks in the current economic climate, such as a decline in the commercial real estate market, which could spark another run on deposits.

Government’s Viewpoint

The Biden administration and Federal Reserve officials believe their actions have stabilised the financial system, including banks that were at risk of a run on deposits. According to administration officials, banks have learned from the “stresses that the failed banks were under” and are “shoring up their balance sheets.” However, the researchers caution that historically, it has been difficult for banks to rapidly alter their financial holdings. Amit Seru, an economist at the Stanford Graduate School of Business and author of the study, cautions, “These communities are still quite vulnerable.”

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Yustika Kusuma Putri, she is social media marketer from Indonesia. I currently work as a Media Manager in Technologie Omicrom Sendas inc.
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