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Silicon Valley Bank collapse: We haven't seen the last of it

Financial Standard
 A Silicon Valley Bank office is seen in Tempe, Arizona, on March 14, 2023. [AFP photo]

Silicon Valley is an enduring mystic in California, a counterweight to Massachusetts's Boston area.

Both States are intellectual citadels with top universities and seedbeds of entrepreneurs.

For Massachusetts Institute of Technology (MIT), we have Caltech, while for Harvard we have Stanford.

For Mark Zuckerberg, we have Meta or Facebook and Sergey Brin for Google.

This regional competition had been the hallmark of the US system, spawning innovations and leading to national competitiveness. Out of curiosity, I have visited both places.

We tried to copy the US system in the 2010 Constitution.

We have ended up competing for the largesse of the national government, not who can start new firms and take them to initial public offering (IPO).

Both hubs are driven by brain gain more than anything else and benefit from diversity. Check the diversity of faculties at say, Stanford or Harvard.

We dislike diversity and love homogeneity. The fame and history of success of the two regions have built a self-sustaining ecosystem that attracts even more success.

There are other hubs in the US but not as famous as Michigan such as Seattle, which is best known for the manufacture of planes.

The mystic of Silicon Valley is probably what made the failure of Silicon Valley Bank (SVB) hit the headlines.

 People walk past a Silicon Valley Bank sign at the company's headquarters in Santa Clara on March 10, 2023. [AP photo]

I doubt if the bank would have had the same publicity if domiciled in a different region. We could ask how a bank located in such a famous place with such brain power could fail. But wait... it's not about Silicon Valley but the economic reality and echoes of the past.

The Ukraine-Russia war brought inflation - public enemy number one, and every country felt it. To reduce inflation, central governments used the time-tested tool - interest rates.

High rates make borrowing expensive; we borrow less money and spend less, reducing the demand for goods and services and by extension, prices fall. But this leads to a rise in unemployment, seen as a lesser evil by most political leaders.

But high rates have unintended consequences. They lower the price of bonds.

The higher the interest rates, the lower the value of the bonds. Remember inverse relationship? Banks, even in Kenya, own huge amounts of bonds.

The fall in the value of bonds had the value of their assets reduced. Silicon Valley Bank found itself in such a bind.

This is on top of customers running for their money and the inevitable happened. The emotions added to the failure of SVB.

That is why presidents and central bank governors are trying to convince the citizens that the banking system is robust enough, trying to calm their fears.

SVB's failure was not just about interest rates rise. There could be other underlying factors like its management and rollback of some post-2008 financial regulations like regular "stress testing" of banks.

The banking sector shares felt the effect of SVB's failure. The global financial system like the power grid is interconnected.

Non-shareholders were affected too. Who wants to lose their life savings?

Think of pensioners. The echoes of past bank failures in the US have stoked these fears. Remember the financial crisis of 2008? We had our fair share of bank failures in the 1980s. So, where do we go from here? The failure of SVB is a blot in the image of Silicon Valley and America as a whole. To be fair to regulators, there is no foolproof regulation.

Circumstances keep changing despite lessons learnt from each crisis.

Regulation is not an exact science; it keeps evolving with technology. A bank run is now easier electronically with customers not having to endure long queues.

 A pedestrian passes a Silicon Valley Bank Private branch in San Francisco, March 13, 2023. [AP photo]

Remember the key players in a financial crisis are human beings, driven by emotions and their unpredictability.

With SVB and Signature Bank failing, we are likely to see more customers shifting their money to well-established banks, which are seen as "too big to fail."

Large banks

Noted how HSBC Bank snapped up SVB's subsidiary in the UK? That could lead to further consolidation in the banking sector, ending with a few large banks.

Would that not make the financial system riskier? Clearly, we should not overreact in such a crisis.

Silicon Valley and Signature banks may have failed, but that is no reason to panic.

Covid-19, the war in Ukraine, terrorism threats and drought are other worries.

The world since the dawn of civilisation has always been shaken by crises, some natural like earthquakes and others man-made like bank runs.

That reminds us that we are human and open to change to exert our creativity and innovation. We should soberly sort out the failures of US banks without making it a global contagion.

Our bankers are too silent on what is happening in the US and Europe, specifically Credit Suisse Bank.

Can we hear from them? Can they also shed light on a Somali bank buying a Kenyan bank, and shall we have a Silicon Savannah Bank at Konza City?

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