Silicon Valley Bank, serving the technology industry for three decades, collapsed on March 10, 2023, after the Santa Clara, California-based lender suffered an old-fashioned bank run. State regulators seized the bank and made the Federal Deposit Insurance Corporation receiver.
We asked William Chittendenassociate professor of finance at Texas State University, to explain what happened and whether Americans should be concerned about the safety of their financial system.
Why did Silicon Valley Bank collapse so suddenly?
The short answer is that the SVB did not have enough money to pay the depositors, so the regulators closed the bank.
But they had to do something with all that money. So what they couldn’t lend, they invested in ultra-secure US government bonds. The problem is the rapid rise in interest rates in 2022 and 2023 caused the value of these securities to plummet. A characteristic of bonds and similar securities is that when yields or interest rates rise, prices fall and vice versa.
The bank recently said some of those securities cost $1.8 billion to sell, and they were unable to raise capital to make up for the loss as their stocks began to fall. This has prompted leading venture capital firms to advise the companies in which they invest take their business out of Silicon Valley Bank. This had a snowball effect, as a result of which a growing number of SVB depositors also withdrew their money.
The investment losses, coupled with the withdrawals, were so great that regulators had no choice but to step in to shut down the bank to protect depositors.
Are the deposits safe now?
From a practical point of view, the FDIC now leads the bank.
It is typical for the FDIC to close a bank on Friday and allow the bank to reopen the following Monday. In this case, the FDIC has already announced that the bank will reopen on March 13 if the Deposit Guarantee National Bank of Santa Clara.
End of 2022, SVB had $175.4 billion in deposits. It is not clear how many of those deposits remain with the bank and how much of them are insured and 100% safe.
For savers with $250,000 or less in cash at SVB, the FDIC said customers will have access to all of their money when the bank reopens.
For those with uninsured deposits with SVB — basically anything above the $250,000 FDIC limit — they may or may not get the rest of their money back. These depositors receive a “Certificate of Recipient” by the FDIC for the uninsured amount of their deposits. The FDIC has already said yes pay some of the uninsured deposits next week, with additional payments possible if the regulator liquidates the assets of the SVB. But if the SVB’s investments have to be sold at a significant loss, uninsured depositors may not receive an additional payment.
What was the last US bank to fail?
Both banks were relatively small – with about $200 million in deposits combined.
SVB was the largest bank to go bankrupt since September 2008, when Washington Mutual failed with $307 billion in assets. WaMu fell in the wake of the fall of investment bank Lehman Brothers nearly brought down the global financial system.
In general, US Bank failures are not that common. In 2021 and 2022, for example, there were none.
Is there a risk that more banks will fail?
End of 2022, SVB was the 16th largest bank in the United States with $209 billion in assets.
That sounds like a lot – and it is – but that’s only 0.91% of it all US bank balances. The risk of the bankruptcy of the SVB spreading to other banks is small.
That said, the bankruptcy of the SVB does point to the risk that many banks run in their investment portfolios. If interest rates continue to rise, and the The Federal Reserve has indicated that they willthe value of US banks’ investment portfolios will continue to decline.
While these losses are on paper only — meaning they don’t materialize until the assets are sold — they are can still increase a bank’s overall risk. How much the risk goes up differs from bank to bank.
The good news is that most banks currently have sufficient capital to absorb these losses – however large – in part because of the Fed’s efforts after the 2008 financial crisis to ensure that financial companies can weather any storm.
So rest in peace for now, the banking system is healthy.