Analysing Modern Bank Failures: Insights, Implications, and Innovations from the SVB Case Study

Introduction

In the classic film 'It's a Wonderful Life,' viewers are introduced to the 'Jimmy Stewart situation' where George Bailey's bank teeters on the edge of disaster, highlighting the fragile nature of trust in financial institutions. This scenario is not simply a Hollywood construct but resonates with real-world banking challenges. Today, even industry stalwarts like Silicon Valley Bank (SVB), known for its robust support to tech startups and high-growth companies, are not immune to the broader questions of the industry's resilience and trustworthiness. As we assess the modern banking landscape, it becomes crucial to understand what can derail such institutions and how we can fortify them for the future. ​

"The collapse of America’s Silicon Valley Bank was ‘the fastest passage from health to death’ since the fall of Barings 28 years ago", the governor of the Bank of England said in March. Established in 1983, it had become more and more successful, funding numerous IPOs and benefiting from the exponential growth of the startup scene during the COVID-19 pandemic. Despite having fewer than two dozen branches, SVB had billions of dollars in deposits and positioned itself as the preferred bank for many tech startups and venture-backed businesses, capturing over 50% of the American startup market. However, SVB encountered a sequence of critical issues that steered it towards closure and the ensuing repercussions in March 2023.  ​

Fed vice chair for supervision Michael Barr said SVB failed "because the bank's management did not effectively manage its interest rate and liquidity risk," calling the collapse a "textbook case of mismanagement." An internal report spearheaded by Michael Barr, the Fed’s vice-chair for supervision, pinned the lender’s failure on management failures, missteps by internal supervisors as well as sweeping regulatory changes made during the Trump administration. ​