Silicon Valley Bank Failure
On Wednesday 8th March, Silicon Valley Bank (SVB) informed the markets of its $2 billion shortfall of capital. Within 48hrs, US regulators had closed the bank due to a run by depositors to withdraw funds.
Our Economist, Michael Hughes, has provided the following comment:
This is another example of the distortions caused by zero interest rate policies for many years. That policy encouraged investing in risky assets particularly start-up tech. As rates rose quite sharply, investors cut their positions. IPOs for tech dried up and tech companies tried to use what cash they had – many in SVB, to keep the business going. As withdrawals gathered momentum SVB looked to raise capital, but with no success. Hence, their bankruptcy.
However, the good news is how well and speedily this situation has been handled. While other distortions will doubtless come to light, the policy responses to date have been impressive. It also lowers the risk of further aggressive rate rises.