SVB Took Risks. That Should Come as No Surprise

The panic over the demise of SVB Financial Group, parent company of California-based Silicon Valley Bank, appears to reflect a widespread misunderstanding about what such institutions do: They’re supposed to take risks, and as a result some, particularly smaller ones, will run into trouble and even fail. What matters for everyone else is that regulators ensure that these companies have ample resources — primarily capital — to prevent their losses from harming taxpayers or the broader economy.

Like most banks, SVB engaged in the age-old business of borrowing short-term from depositors and making longer-term investments in assets such as bonds and corporate loans, profiting from the higher yields that the latter typically pay. Unfortunately, the tech startups that made up most of the bank’s customers started running low on cash, forcing it to sell some of those investments at a loss. It then attempted to raise more money from shareholders, to make up for the losses and restore confidence. When that failed, SVB reportedly entered talks to sell itself on Friday, then was placed into receivership by regulators.