The Everyman's Guide to SVB's Fall - Here's What Actually Happened
Silicon Valley Bank, the Northern California-based go-to financial institution for venture capitalists and tech entrepreneurs, shuttered its doors on Friday after 40 years in business.
The bank’s closure has sent shockwaves through the financial sector. The fall of the bank created such a panic that President Joe Biden, Treasury Secretary Janet Yellen, and U.S. Federal Reserve chair Jerome Powell each took measures to try and prevent both large-scale hysteria and economic collapse
Those moves might prove quick enough to prevent a domino effect that takes numerous regional banking chains with SVB into insolvency.
The federal government did not act quickly enough to prevent the demise of Signature Bank, which went the way of SVB on Sunday as investors who were spooked by the catastrophe in Silicon Valley rushed to withdraw money that the New York City-based bank did not have.
Barron’s reported the New York Department of Banking Services closed the institution to prevent the disease from spreading. The Federal Deposit Insurance Corporation seized control of the bank and its assets, as it did with SVB following moves from state regulators in California.
It will attempt to recoup losses incurred by the institutions.
The FDIC only insures bank deposits up to $250,000 but will make investors in both institutions whole, the Federal Reserve has pledged.
How SVB Collapsed
We know Signature Bank went belly-up due to the panic initiated by SVB’s collapse. The question is how did SVB, the country’s 16th-largest financial institution, go under so quickly?
There will be a multitude of concrete reasons for the bank’s demise offered as an autopsy on the institution is performed.
One emerging narrative blames Donald Trump for the collapse, citing legislation he signed to make banking regulations less onerous on small banks. The New York Times raised that question and described SVG as “relatively small.”
The facts, however, belie that characterization, and in a particularly damning incident, the New York Times produced an entire graphic and table showing just how enormous SVG actually is when looked at in terms of deposits and size of failure.
There is speculation the root cause for SVB’s failure was its focus on targeting tech investors, its investment in long-term bonds, and interest rate hikes from the Federal Reserve. Axios Markets reporter Matt Phillips theorized interest rates discouraged tech companies from seeking loans as the industry used its own money to operate.
Writing for The Wall Street Journal, columnist Andy Kessler suggested SVB’s focus on equity and inclusion may have had a part to play in the bank’s mismanagement.
“In its proxy statement, SVB notes that besides 91 percent of their board being independent and 45 percent women, they also have ‘1 Black,’ ‘1 LGBTQ+’ and ‘2 Veterans.’ I’m not saying 12 white men would have avoided this mess, but the company may have been distracted by diversity demands,” Kessler wrote.
According to Forbes, the position of top risk assessment official at SVB remained vacant from April 2022 until January 2023. At the same time, the company had built out and invested heavily in projects aimed at diversity, equity and inclusion.
But SVB could have survived if not for panic and an ensuing Great Depression-era bank run.
An Old-Fashioned Run on the Bank
After the economy faltered following the Stock Market Crash of 1929, everyday working Americans became spooked by the prospect their cash would not be available to them, so they ran to their banks to make cash withdrawals.
Soon, banks from coast to coast no longer had the cash on hand to fulfill their obligations to account holders. The FDIC was created by the Emergency Banking Act of 1933, and the rest is history.
In the case of SVB, panicked venture capitalists and others with millions of dollars or more invested with the bank all made a mad scramble to withdraw their cash after March 8 when SVB’s parent company, SVB Financial, announced it was forced to sell a $21 billion bond portfolio at a $1.8 billion loss after taxes.
But panic was responsible for the undoing of SVB and Signature Bank only days following a reported loss by the former’s holding company.
Much of the frenzy was due to the fact the FDIC only insures up to $250,000 for each customer per bank account, which includes savings accounts, checking accounts and certificates of deposit.
To simplify the matter: Wealthy SVB investors feared losing their money, so they initiated a bank run. Now, the institution has been taken over by federal regulators as it did not have the liquid capital to cover the cash retreat.
A Historic Collapse
The New York Times reported SVB’s collapse is the second-largest bank failure in U.S. history only behind that of Washington Mutual Bank, which collapsed in 2008. Signature Bank comes in third on the list, according to Yahoo Finance.
In its initial analysis, the FDIC reported SVB had roughly $209 billion in total assets and roughly $175 billion in total deposits at the end of 2022.
It is still being determined how many deposits were uninsured. Forbes reported that uninsured U.S.-based and foreign deposits totaled in the billions.
The exact dollar amount of uninsured deposits in excess of the insurance limits is unknown. That number will be determined once the FDIC obtains all additional information from the bank and its customers.
The Biden Administration’s Involvement
Yellen signaled on Sunday that SVB was not too big to fail and would not receive a Great Recession-era bailout.
She told CBS News, “During the financial crisis, there were investors and owners of systemic large banks that were bailed out.”
Yellen added, “And the reforms that have been put in place means that we’re not going to do that again. But we are concerned about depositors and are focused on trying to meet their needs.”
SVB investors were assured they would have access to their money by Monday.
Biden also cautioned that his administration did not see cause for wider concern as the federal government attempted to contain the fallout.
“Americans can rest assured that our banking system is safe. Your deposits are safe. Let me also assure you, we will not stop at this. We’ll do whatever is needed,” he said Monday as he addressed the situation from the White House.
SVB and Signature Bank both catered to niche investors, and both institutions’ holdings paled in comparison to those of large, national banking chains.
Of course, bank runs initiated by panic are always self-fulfilling prophecies. SVB would have been operating normally this week had it not been for a hole in its balance sheet.
The strength of the country’s financial sector is ultimately decided by the confidence of the individual investor.
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