Introduction

In this interconnected financial world, a major bank failure can create a ripple effect on the entire economy. The world has seen some spectacular and sensational failures in the global banking system, like the Asian Financial Crisis (1990), Dot Com Crisis (2000) and the Global Financial Crisis (2008-09), a few worth mentioning. Each failure gives us many lessons to learn the hard way. However, life is unpredictable, and the recent collapse of the Silicon Valley Bank has underlined the same fact. This article analyses the story of this collapse going back to history to understand what actually happened.

Global financial crisis

The global financial crisis commenced with the boom in the US housing market. With the rise in property prices, people started to borrow recklessly to buy or build houses. Banks were doing aggressive lending, and loans were even given to subprime borrowers who did not have the ability to repay. These loans were then sold as Mortgage-Backed Securities (MBS) to investors who considered them safe assets, rated so by credit rating agencies. However, the fall in housing prices led to a decline in the value of MBS and caused losses for lenders and investors. Foreign banks were also associated with the US housing market, leading to a global impact of the crisis.

The failure of Lehman Brothers and other financial firms created a panic in financial markets worldwide, causing investors to withdraw their money from banks and investment funds. This led to dysfunctional financial markets, businesses hesitating to invest, and households losing their confidence to spend, resulting in severe recessions in the US and other economies. To combat this, central banks rapidly lowered interest rates, lent money to banks and other institutions, and purchased financial securities to revive economic activity. Governments also increased their spending to stimulate demand and support employment while regulators strengthened their oversight. The crisis highlighted the importance of efficient risk management in the banking sector.

Recent failure of US banks

The recent failure of Silicon Valley Bank (SVB) is being compared to the 2008 financial crisis and is considered the second-largest crisis in US banking history. Established in 1983, SVB was a favoured option for startups and was the sixteenth largest bank in the country, focusing on the innovation economy. Account opening was convenient, and the requirement of a Social Security number or a physical presence in the US was not mandatory. The account could only be opened through an investor reference, ensuring high access and service. However, SVB recently reported a loss of $1.8 billion after selling $21 billion worth of bond assets, which is mostly attributed to external monetary policy changes. It was discovered that SVB had a negative cash balance of around $958 million. Signature Bank is the third largest bank to fail and had exposure to digital assets such as cryptocurrencies, with assets worth over $110 billion and deposits of nearly $90 billion as of December 2022.

These collapses raise concerns about the resilience of the US financial and banking system and the potential for a repeat of the 2008 financial crisis. The news about Credit Suisse, a systemically important financial institution, being acquired by UBS Group due to huge losses and governance issues has further added to the panic in financial markets.