After the US Federal Reserve (Fed) declared an internal probe following the collapse of Silicon Valley Bank (SVB) last week, two more US government bodies want to scrutinize the causes of the run on the institution's deposits that put it on the brink of bankruptcy , as stated in The Wall Street Journal (WSJ) report.

SEC and DoJ to Investigate Silicon Valley Bank Collapse

The Securities and Exchange Commission (SEC) and the Justice Department (DoJ) have launched investigations into SVB. According to people familiar with the matter who wished to remain anonymous, the inspections are in the preliminary stages and may not necessarily lead to charges.

Conducting such investigations are often practiced when large financial institutions face sudden liquidity problems. For example, the purpose of the SEC's and DoJ's probes may be to identify issues that have arisen at SVB to ensure that they will not be repeated in the future.

Additionally, the ongoing investigations are looking into stock sales made by officers of SVB Financial shortly before the bank's failure. According to the sources, the Justice Department's fraud prosecutors in both Washington and San Francisco are involved in the probe.

Shares of SVB Financial, the former owner of SVB, plunged more than 60% during Thursday's session. Thus, the stock exchange decided to halt their quotes due to the increased volatility on Wall Street since Friday.

The dynamic fall stopped at $106 per share, well below the pandemic 2020 low, testing levels last seen in 2016. In the aftermath, the share price of local First Republic Bank also slumped over 60% and Credit Suisse stocks reached a new all-time low. However, Tuesday’s session brought a visible rebound and a bullish correction of banking shares.

Earlier on Tuesday, Finance Magnates reported that the Fed had launched its own internal investigation into the collapse of the SVB. Michael S. Barr, the Vice Chair for Supervision at the central bank, and his team will review how SVB was regulated and supervised by Fed before its collapse in search of potential negligence that could explain the reasons for the sudden bankruptcy of the institution. The final results will be released to the public by 1 May 2023.

What Happened at Silicon Valley Bank?

Silicon Valley Bank was established in 1983 to cater to the banking needs of the tech industry in Silicon Valley. It quickly became one of the largest banking institutions in the US, offering a variety of products, such as deposit services, loans, investment products, cash management, and commercial finance.

The bank saw a significant increase in deposits, reaching $198 billion by the end of the first quarter of 2022, which was three times more than it had at the end of 2019. This growth was primarily due to the bank's close-knit customer base in the tech industry. SVB invested in 5-year bonds and 10-year mortgage-backed securities, generating a fixed return of about 1.5%. However, these investments turned sour when interest rates increased, and the bank failed to manage its risks.

The bank's problems worsened when some of its customers started withdrawing their deposits, leading to a feedback loop that caused a significant drop in deposits from $198 billion in March 2022 to $165 billion in February 2023, which is a decrease of 16%. This bank run ultimately led to the SVB's failure. The previous Chief Risk Officer left in April 2022 and was replaced in January 2023, but it was too late to save the bank.