MSU RED: Denver tech sector hit hard by bank closure.

March 21, 2023.

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.