Far from being a one off, the failure of SVB reveals systemic problems playing out across the economy, argues John Clarke

The collapse of the Silicon Valley Bank (SVB) on 10 March represents ‘the second-largest failure of a financial institution in US history.’ It developed rapidly and in a form that left regulators scrambling to contain the damage. The bank has been placed under the control of the US Federal Deposit Insurance Corporation (FDIC), ‘an independent government agency that insures bank deposits and oversees financial institutions’.

The crisis that brought the tech lender down played out over a forty-eight-hour period. ‘The wheels started to come off on Wednesday, when SVB announced it had sold a bunch of securities at a loss and that it would sell $2.25 billion in new shares to shore up its balance sheet. That triggered a panic among key venture-capital firms, who reportedly advised companies to withdraw their money from the bank.’

By the next day, SVD’s stock had plummeted and this was impacting upon a number of other banks. On Friday, ‘SVB’s shares were halted and it had abandoned efforts to quickly raise capital or find a buyer.’ The FDIC stepped in early in the day to take control of the situation, making it clear that ‘all insured depositors will have full access to their insured deposits by no later than Monday morning.’

That this action took place at a time of day when the markets were open is highly unusual and reflects the sharpness of the situation. Better Markets CEO, Dennis M. Kelleher, noted that ‘SVB’s condition deteriorated so quickly that it couldn’t last just five more hours. That’s because its depositors were withdrawing their money so fast that the bank was insolvent, and an intraday closure was unavoidable due to a classic bank run.’

More to come?

The political and financial establishments immediately united around the message that the failure of the SVB should not be seen as a sign of things to come. A spokesperson for the asset management company, Amundi, for example, asserted that ‘SVB was small, with a very concentrated deposit base’ and that this ‘is very much an isolated, idiosyncratic case.’

Marxist economist Michael Roberts has challenged this high-placed consensus. He points out that ‘SVB is no minnow.’ It ‘was among the top twenty American commercial banks (the 16^th largest), with $209 billion in total assets at the end of last year, according to the FDIC’, and it ‘offered services to nearly half of all venture backed tech and health care companies in the US.’

Roberts also challenges the assumption that the collapse of this particular bank should be viewed as ‘a one-off’. He suggests that ‘SVB’s collapse is due to a wider event, namely the Federal Reserve’s aggressive interest-rate hikes over the past year.’ During the years of low interest rates, ‘banks like SVB loaded up on long-dated, seemingly low-risk treasuries. But as the Fed raised interest rates to ‘fight inflation’, the value of those assets fell, leaving many banks sitting on unrealized losses.’

Interest-rate increases have hit the tech sector especially hard, ‘undercutting the value of tech stocks and making it tough to raise funds. So tech firms started to withdraw their cash deposits at SVB to meet their bills.’ With the bulk of its $209 billion in assets concentrated in tech startups, SVB was unable to withstand this shock, as it was ‘squeezed by the scissors of an impending slump: falling profits in the tech sector and falling asset prices caused by rising interest rates.’

If SVB has proven to be the weakest link, however, the malaise to which it fell victim has spread through much of the chain. ‘The FDIC recently reported that US banks are sitting on $620bn of combined unrealised losses in their securities portfolios.’ According to one market analyst: ‘Everyone on Wall Street knew that the Fed’s rate-hiking campaign would eventually break something, and right now that is taking down small banks.’ This alarming development will be rendered far more serious by the dogged determination of the Fed ‘to continue to hike interest rates even faster and higher than financial investors expected.’

Efforts to play down the broader context that underlay the failure of the SVB are unravelling. On 12 March, it was announced that a second bank, Signature Bank, had been shut down that day by New York bank regulators. Signature, like SVB, ‘had a big share of large and uninsured deposits — the kind that onlookers worried about.’

At the same time, ‘Federal regulators announced … that the government would ensure that all depositors of Silicon Valley Bank … would be paid back in full as Washington rushed to keep fallout from the collapse of the large institution from sweeping through the financial system.’ Finally, ‘the Fed also announced that it would set up an emergency lending program, with approval from the Treasury, to funnel funding to eligible banks and help ensure that they are able to ‘meet the needs of all their depositors.’

‘Creative destruction’

Whether the crisis within the US banking system is contained for the present or becomes something very much more serious, the collapse of SVB speaks to major changes that have occurred at the commanding heights of global capitalism. The sudden post-pandemic inflationary surge, under the impact of ‘supply shocks,’ was the immediate factor that convinced central banks across the world to adopt a more hawkish approach and drive up interest rates. This situation, however, only brought to a head a debate among political leaders and central bankers about just how and when to abandon the effort to sustain sluggish economic recovery through low interest rates and quantitative easing.

During the financial crisis and Great Recession of 2008-2010, vast resources were deployed to bail out failed companies and sustain major economies. In the years that followed, central banks focused on an ongoing attempt to stimulate productive investment, but it had quite dismal results. ‘The most extreme strategists of capital’ were unhappy with this approach all along. Though it didn’t prevail until recently, the view that stimulatory efforts would fail and that a ‘purging’ was needed, was consistently advanced by such hardliners.

In the 1930s, as the Great Depression unfolded and produced vast misery, US Treasury Secretary, Andrew Mellon, argued against a focus on stimulation. As he very bluntly put it: ‘Liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate … it will purge the rottenness out of the system. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less enterprising people.’

If few political leaders would want to be quite that candid today and prefer to speak of ‘controlled landings’ that can supposedly avoid outright economic slump, Mellon’s logic is at work, nonetheless. The tactical shift to very much higher interest rates is a return to an approach that can be described as ‘creative destruction’. This certainly involves an assault on working-class living standards, but it also means driving many unprofitable ‘zombie companies’ out of business and risking consequences very much worse than the present travails of one US tech lender.

The spectacle of the Biden administration trying to prevent a full blown banking crisis that is largely attributable to measures being taken by the Federal Reserve, which are likely to continue and intensify, reminds us that we have entered a period of enormous economic instability, severe political uncertainty and considerably intensified class struggle. The demise of the Silicon Valley Bank is, indeed, an ominous sign of the times.