Silicon Valley Bank failure and Money Market Funds’ flows

Abstract

After the first 25 bps increase announced on 16th March 2022, the US central bank continued to sharply adjust interest rates to face raging inflation levels, which were growing over 8%. A year later, the FED interest rate reached an outstanding 5% level, never experienced after the Global Financial Crisis. This strong shift in monetary policy heavily affected the banking sector: if on one hand many banks benefitted from higher net interest income (NII), on the other severe vulnerabilities emerged. This is the case of Silicon Valley Bank, which failed to meet withdrawal demand due to its liquidity scarcity and lack of sound Assets and Liabilities Management (ALM). In the meantime, liquidity moved to more attractive interest-bearing investments such as Money Market Funds, which gained popularity being low-risk and highly responsive to interest rate changes. The scope of this dissertation is to investigate if and how the growth in MMF volumes has contributed to SVB failure.