Silicon Valley Bank Collapse: The Fallout

The sudden collapse of Silicon Valley Bank brought back bad memories for everyone affected by the 2009 global financial crisis. SVB is the largest bank to fail since the Great Recession, and it is the second largest bank to fail in US history. That’s not the sort of recognition any financial institution wants. 

Now banking clients of all sizes are worried that the SVB disaster will destabilize other financial services companies and put their deposits at risk. Are their concerns valid, or can the collapse be contained to a single bank? In other words, will Silicon Valley Bank affect other banks? 

Will More Banks Fail After The SVB Meltdown? 

The March 10th reports of Silicon Valley Bank’s failure prompted widespread fear that SVB is just the beginning.

Individuals and businesses are anxiously calculating the likelihood that other banks will begin falling like dominos. It didn’t help that within 48 hours of the SVB announcement, federal regulators shut down Signature Bank – another large commercial bank that drew most of its business from a limited number of high-risk industries. 

The good news is that no part of the government wants to see another financial crisis, so lawmakers and regulatory agencies acted quickly to prevent Silicon Valley Bank’s failure from infecting the entire financial system. Will Silicon Valley Bank affect other banks? Maybe a little, but thanks to fast action by regulators, the risk of banks collapsing like dominos appears minimal. 

So, why did Silicon Valley Bank collapse? And what happened to Signature Bank? More importantly, will SVB and Signature Bank customers lose their money? 

Why Did Silicon Valley Bank Fail? 

After the initial shock of Silicon Valley Bank’s dramatic downward spiral wore off, the big question became “how did this happen?” How could Silicon Valley Bank, the go-to financial services provider for a massive portion of tech companies, suddenly go from business-as-usual to complete devastation? 

The short answer is that there was a run on the bank, just like the bank runs depicted in Mary Poppins and It’s a Wonderful Life. Customers heard rumors that their money wasn’t safe in Silicon Valley Bank, so they withdrew large amounts. Soon, the bank didn’t have enough cash to honor all of the withdrawal requests, causing widespread panic. 

The underlying cause of the run on Silicon Valley Bank is a bit more complicated. It was years in the making, and it has everything to do with 2022’s high levels of inflation, the subsequent increases in interest rates, and the decline in tech stocks that followed. 

As its name suggests, SIlicon Valley Bank catered to the tech startups that gave Silicon Valley its nickname. The bank was founded in Santa Clara, California, in 1983. It deliberately focused on attracting tech startups, calling itself a “partner for the innovation economy.” By the time it closed, it was the 16th largest bank in the country with approximately 40,000 clients. As of December 31, 2022, it had $209 billion in total assets. 

Some of the biggest client names on the lending side included Beyond Meat, CrowdStrike, Pinterest, Shopify, and ZipRecruiter. On the deposit side, SVB had well-known brands with large balances, including: 

  • BlockFi – $227 million
  • iRhythm – $55 million
  • Lending Club – $21 million
  • Payoneer – $20 million
  • Roblox – $150 million
  • Rocket Lab – $38 million
  • Roku – $487 million
  • Sangamo Therapeutics – $34 million

Everything went smoothly for Silicon Valley Bank while interest rates were low and tech companies were rapidly rising in value. Like all banks, SVB kept a percentage of total deposits in cash and invested the rest. During the period of low interest rates, the asset of choice was long-dated Treasury bonds and mortgage bonds. SVB stocked up on these towards the end of 2021. 

The trouble was that SVB chose these investments based on 2021 market conditions – low interest rates, huge jumps in the value of tech stocks, and plenty of startup funding flowing through the tech community. What SVB didn’t do is consider the possibility that those conditions would change. 

Interest rates started going up in early 2022, and SVB’s portfolio of low-interest bonds became harder to liquidate. Newer bonds had higher interest rates, so they were far more attractive to investors. That wouldn’t have been an issue if SVB didn’t need cash. It could have waited for the bonds to mature while accumulating new deposits along the way. Unfortunately, that’s not what happened. 

Interest rates went up so quickly that investors got nervous and sold off their high-growth tech stocks in favor of safer alternatives. On top of that, venture capitalists stopped handing out money to tech startups with wild abandon, so those companies had to dip into their deposits to continue operations.  

As SVB clients began pulling money out, the bank struggled to keep up. On Wednesday, March 8th, it disclosed that it had sold some of its bonds to make up the difference – but with the interest rate issue, SVB lost $2 billion on those sales. 

That’s when things got messy. Depositors began to question whether the bank would remain solvent, and they started withdrawing their funds. The situation spiraled out of control because as more withdrawal requests came through, the more unstable the bank became. Within two days, the entire system collapsed. 

Why Did Signature Bank Get Shut Down? 

As the drama with Silicon Valley Bank unfolded, investors began reviewing their holdings in similarly-situated banks – specifically, those with a client base primarily consisting of startups and those who had made similar investments in low-rate, long-term bonds. The three with the most red flags – Signature Bank, First Republic, and Western Alliance – saw their share prices fall throughout the day on Friday. 

It is important to note that more traditional commercial banks didn’t experience the same issue – they have a far more diverse client base, and their portfolios are not as concentrated in the same types of bonds. 

First Republic and Western Alliance released statements reassuring clients that they were confident in their ability to weather the current storm. Signature Bank didn’t comment – and on Sunday, regulators announced that it would be closed. Between its heavy involvement with tech startups and its exposure to risk from its cryptocurrency services, regulators said that Signature Bank could “threaten the stability of the entire financial system.”

Will SVB Depositors Get Their Money? 

The Great Depression was marked by a series of bank failures that left depositors with nothing. The losses undermined faith in the financial system, and many people stopped trusting banks with their money. That lack of confidence weakened the nation’s ability to rebuild the financial system and recover from the financial crisis. The solution turned into one of the most important programs to come out of this period: the Federal Deposit Insurance Corporation (FDIC)

The FDIC protects deposits up to a specified limit against bank failure. The cap is currently $250,000 per customer per account type. However, in the case of Silicon Valley Bank, $250,000 is barely a drop in the bucket. Nearly all of SVB’s clients have more than $250,000 in their accounts, and barring some sort of intervention, nearly $175 billion of customer money was at-risk. In fact, it was this very risk that prompted the initial bank run, and those that didn’t pull their money out before the 10th were left in limbo. Would they be completely without cash come Monday morning? 

The US Treasury Department, the Federal Reserve, the FDIC, and other regulators worked through the weekend to prevent a larger panic that would threaten regional banks nationwide. On Sunday evening, March 12th, they announced a plan that would make all SVB and Signature Bank depositors whole – regardless of whether their total balances exceeded the standard FDIC limit of $250,000. 

Highlights of the plan include the following points:

  • All deposits – even those that exceed the standard $250,000 cap – will be available to depositors immediately. 
  • A Bank Term Funding Program has been launched to ensure any institutions that experience a run on deposits can pay depositors in full without collapsing like SVB. The banks would use assets like long-term bonds as collateral for government loans. 
  • The funds for these programs are not “bailouts” and they won’t use taxpayer money to protect depositors. Instead, the funds come from fees that banks pay into the insurance system. 
  • If the funding program runs short, the Treasury Department has committed to covering an additional $25 billion to keep the financial system stable. 

Of course, banks can’t collapse without some repercussions. In this case, the biggest losers will be shareholders and unsecured creditors. The stock is now worthless, and those funds cannot be recouped. Any proceeds realized from the sale of SVB and Signature Bank assets will go to depositors, not creditors and shareholders. 

The best news to come out of this crisis is that the market is rising as investors bet the Fed will reconsider its heavy-handed approach to interest rates. Analysts and economists have speculated that the collapse of Silicon Valley Bank and Signature Bank will reduce or eliminate additional interest rate increases for a while – and if inflation comes down without additional interest rate increases, then there would be no reason to restart that trend.

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