Silicon Valley Bank and Silvergate Capital COLLAPSE: WHAT HAPPENED?!

This week, Silvergate Capital and Silicon Valley Bank have been experiencing significant difficulties due to classic bank runs, caused by a decrease in deposits and an increase in cash withdrawals. These problems have been due, in part, to economic and financial conditions, causing a loss of funds when backing assets were sold at substantial losses. Both banks have suffered from the same challenge and have been affected by the COVID-19 pandemic.

The increase in Federal Reserve interest rates has contributed to the problems faced by Silvergate and Silicon Valley Bank. The rise in yields on U.S. Treasuries has led to lower market values of pre-hike bonds with lower yields. This has affected banks' stability and has caused bank stocks to fall, particularly for regional and mid-sized banks.

In addition to these issues, Silvergate and Silicon Valley Bank faced specific business cycle issues that may not apply more broadly. Both banks had massive inflows of funds in 2020 and early 2021, but when customers began drawing down their deposits, the banks had to cash in liquid assets at a loss.

In summary, these challenges are due to the COVID-19 pandemic and real business cycle issues, both of which are interrelated. The COVID-19 pandemic has caused real cost rises, and the money supply has been significantly expanded by relief and bailout policies, which have led to inflation. The effect of these policies will take years to fully assess.

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