How Is Silicon Valley Bank Downfall Impact On FIRE Sectors?

The collapse of Silicon Valley Bank (SVB), the 16th largest bank in the US, offers several lessons to be learned by the financial industry.

The FIRE acronym has been in use since at least 1982 to describe the critical economic sector encompassing finance, insurance, and real estate. Businesses involved in this industry are interconnected and have a significant presence in the US economy, contributing around a fifth of the GDP. However, due to its sensitivity and inherent risks, any disruption in this sector can lead to a cascading effect on the overall economy.

The collapse of Silicon Valley Bank (SVB), the 16th largest bank in the US, offers several lessons to be learned by the financial industry. SVB's demise can be attributed to its excess success, where a surge in deposits with almost zero interest rates was used to purchase long-term government bonds and mortgage-backed securities. When the US Federal Reserve raised interest rates to combat inflation, the value of these investments dropped rapidly, leading to a 10% drop in asset value, and the bank eventually defaulted.

How Is Silicon Valley Bank Downfall Impact On FIRE Sectors?

The connection between banking and securities is prominent in the context of SVB's collapse, highlighting the overlapping of financial products and operations, leading to fundamental vulnerabilities and risks. At the same time, real estate bonds secured by mortgage loans introduced futures risk, the primary cause of SVB's downfall.

The fundamental cause of SVB's collapse lies in weak governance and risk management, especially in the context of the rapid increase in interest rates. The situation highlights the need to separate the activities of the FIRE group definitively and consistently to mitigate risk. Commercial banks with short-term mobilized capital as the primary source need particular attention in this regard. For financial institutions, risk management needs to remain a priority regardless of the environment they function in.

SVB's collapse showcases the importance of striking a balance between profitability and risk management. The US's attempts to regulate the financial industry through laws like Glass-Steagall and Dodd-Frank have met with limited success. However, regulatory bodies worldwide must continue to implement strict regulations to prevent future financial collapses. The story of SVB serves as a reminder that no financial institution is too big or too successful to fail.