SVB Collapse: A cautionary Tale of Concentration Risk and Lending to the Rich

Silicon Valley Bank, First Republic, Signature Bank- in one week America saw its second largest bank failure in US history along with the collapse of other smaller banks. What links these together? A cautionary tale on risk and the impact of lending only to the most wealthy facet of society

The Silicon Valley Bank Customer Profile

At the start, Silicon Valley Bank had an explosive growth, as many of its tech company clients were flourishing during the beginning of the pandemic. It took the risk of lending to risky tech startups and crypto firms that no one else would lend to. Its client base consisted of mostly extremely wealthy customers and it lent solely to this group, ignoring anyone else as the wealthy clients created the growth. Its deposits tripled between 2020 and 2022, with billions and billions of dollars flowing in. Silicon Valley Bank took all of those billions it earned from taking those risks and put them into what is supposed to be the least risky investment around: US government bonds.

Government Bonds

Bonds are normally seen as a risk free investment. Bonds are loans individuals give the government for a set period of time (3 months, 1 year, 10