The most important bank in Silicon Valley failed on Friday, prompting a Sunday night bailout for some of the wealthiest people in the world as the Fed

This Bank Panic Should Not Exist

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2023-03-17 00:00:11

The most important bank in Silicon Valley failed on Friday, prompting a Sunday night bailout for some of the wealthiest people in the world as the Federal Reserve opened a new emergency lending program hoping to prevent the crisis in California from triggering a nationwide banking collapse. As with any financial crash, it’s impossible to predict where exactly the money will flow next, but it’s clear that the tech sector that reshaped American business and culture in the 21st century is coming apart.

The nexus of this breakdown is Silicon Valley Bank, a firm with $209 billion in assets as of December 31, 2022. SVB works hand-in-glove with venture capital firms, tech start-ups, and a lot of very rich people in California, claiming nearly half of all VC-backed tech companies and over 2,500 VCs as its clients. Its demise is the immediate product of horrendous risk management by the bank’s officers—but there are also important public policy failures here, particularly the Fed’s high-interest rate policy and a reckless, bipartisan bank deregulation law signed by President Donald Trump in 2018.

It’s hard to imagine a deeper embarrassment for Silicon Valley. Tough-talking tech dudes who spent years celebrating the genius of free markets totally lost their minds in a bank panic, failed to coordinate a private rescue of their own sector, and then went whining to the federal government for a bailout. What’s worse, many of these guys—including SVB Bank CEO Greg Becker—lobbied Congress to eliminate tougher capital and liquidity regulations for banks like SVB, and got what they wanted. Becker’s testimony to the Senate Banking Committee (see p. 114) feels destined for the corporate hubris canon. Hailing “SVB’s deep understanding of the markets it serves, our strong risk management practices, and the fundamental strength of the innovation economy,” Becker declared that, “SVB, like our mid-sized bank peers, does not present systemic risk.”

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