Denver City Wire

The collapse of Silicon Valley Bank this month hit Colorado businesses hard.

Many companies within the Denver-Boulder tech sphere (often dubbed Silicon Mountain) found themselves scrambling to access cash until the federal government stepped in and guaranteed their deposits. Since then, there have been further troubling financial developments almost daily, including the purchase of Credit Suisse by UBS, both based in Switzerland, over the weekend.

It’s uncertain where this crisis is heading, so RED asked Kishore G. Kulkarni, Ph.D., professor of Economics at Metropolitan State University of Denver, for an expert view.

Can you explain what happened at Silicon Valley Bank?

Following a period of sustained growth, the bank invested heavily in Treasury bonds and other long-term assets. And while interest rates remained low, this seemed an effective and relatively low-risk way of creating profitable assets.

But the Federal Reserve’s aggressive interest-rate hikes over the past year greatly increased the bank’s liability. Now that investors could buy bonds elsewhere at higher interest rates, the bonds held by SVB declined in value. Ultimately, the scale and speed of these interest-rate hikes created a huge balance-sheet imbalance in which the bank’s executives could not create assets as fast as their liabilities were mounting. And once the bank reached such a point, it was only a matter of time until it collapsed.

This is a developing story, and other institutions may yet be at risk. What’s the current outlook?

Several other banks are struggling just now, some of which may well find themselves in the same boat as Silicon Valley Bank. The question is: How many? While I don’t know the answer to that, I’d say a conservative estimate would be around five or 10 banks will go under. But however this situation turns out, the solution now is for the bigger banks to continue giving loans to their smaller competitors, as happened recently with First Republic Bank. If the main players can help steer the more vulnerable midsize banks through this crisis and keep them afloat, that will benefit the whole industry.

Why has the collapse hit metro Denver so hard?

It was inevitable, really. The Denver metro and Boulder areas are both flush with tech-related companies, which are heavily invested in software, computing and innovation. And it’s a simple fact that such companies, much more than businesses in other sectors, have tended to deal exclusively with Silicon Valley Bank. SVB was a major lender to the tech sector, partnering with around half of all tech companies in the U.S. and catering specifically to their needs. So when it collapsed, these companies were disproportionately affected.

Why do tech companies and startups seem so vulnerable at the moment?

The basic reason is that the pace of new technological development has diminished over the past three years. Although there is still some growth, we’re just not seeing the same levels of buildup in tech companies and startups these days. Many businesses have been hit by rising challenges from inflation, layoffs and falling stock prices, and the value of U.S. technology companies has dropped significantly even in the past 12 months.

This situation has led thousands of companies to place more dependency on loans, which of course meant that the subsequent failure of the U.S.’s largest tech-centric bank hit them hard. The fact that even the biggest tech giants — companies such as Google, Meta, Microsoft and Amazon — have laid off around 150,000 employees says a lot about the slow rate of economic growth within the tech sector.

What will you be saying about this latest crisis in your classes?

For MSU Denver students working toward a business career, and especially for those currently studying banking as a business, this story contains two valuable lessons. First, you need to recognize how difficult it can be to anticipate what challenges might arise in the future. And second, you nonetheless need to make sure you’re ready for those challenges. If you don’t read the economic warning signs or anticipate them correctly, you will suffer, as Silicon Valley Bank and several other institutions are now learning the hard way.

When dealing with economics, you should always be a careful and responsible manager. That’s something we constantly stress to our students at MSU Denver’s College of Business and a fundamental principle they learn early on. But clearly, it’s a lesson that the executives at Silicon Valley Bank failed to grasp.

Each new day seems to bring fresh troubling news for the banking sector. What will happen next?

Forecasting is always a very dangerous business for economists. But even in a worst-case scenario, my hunch is that this current situation will not turn out to be as bad as the 2008 financial crisis, when people had made lots of unethical and even potentially illegal decisions to create highly questionable loans.

While there are certainly some serious balance-sheet questions this time around, I think they have stemmed more from incompetence than malice. And even though things may yet get a little bit worse, I don’t think they will reach the same depths as last time. The two key words that everyone feared in 2008 were “systemic risk,” and I don’t think there’s any real danger of that here.

Original source can be found here.