Silicon Valley Bank: 19th-century financial crises show how today’s regulators could help repair the economy
The collapse of Silicon Valley Bank has sent shockwaves through the financial world, bearing similarities to the 2008. Professor Lucy Newton takes a look even further back to see what we can learn from 19th-century financial crises.
A bank failure wipes out the money available to its customers and freezes any capital that’s already in circulation. Depositors, borrowers and owners or shareholders all suffer as a result, as does wider economic activity and often the communities or business sectors that the banks serves.
These issues can become all the more concentrated in the wake of a regional or specialist banking collapse due to the specific reach of the failed institution. Silicon Valley Bank (SVB) is the second largest bank failure in US history but its focus was specific, it specialised in providing funding to start-ups, venture capitalists and technology firms.
This banking collapse reminds us of a spate of private bank failures that created a financial crisis at the start of 19th century in England and Wales. Although these banks all differed from SVB in terms of scale and volume of finance provided, these early 19th-century institutions served specific communities.
They also had a tendency to fail. And when they did, the impact on the regional economy was considerable. Lines of credit for local businesses dried up and some struggled to survive.
Banking families were also adversely affected. The failure of private banks owned by Henry Austen, brother of author Jane Austen, for example, had a detrimental impact on the financial health of the wider Austen family. Henry ended up owing £58,000 to his creditors, which would be about £6.5 million in today’s money.
Regulations put in place after these failures aimed to make these organisations more stable by diversifying the way they made money. This could provide some important lessons for regulators assessing the damage of the latest banking crisis.
New laws were passed in 1826, following the 1825-1826 financial crisis in which the country was claimed to have been “within twenty-four hours of barter”. In other words, the financial system was close to collapse – without access to money, people would have to resort to merely exchanging goods.
This crisis saw the failure of 93 private banks across England and Wales – around 15% of the total market.