Silicon Valley Bank Fails and What is Next?

What happened?

The failure of Silicon Valley Bank represents the largest bank failure since the 2008 financial crisis. SVB based out of Santa Clara was the 16th largest bank in the U.S. as of the end of 2022 with about $209 billion in assets. The sudden collapse of an institution of that size sent shockwaves through the sector and the economy as a whole.

Many began to question the safety of their own financial institutions and started to withdraw their money from smaller regional banks. As a result two similar banks Silvergate and Signature suffered deposit runs and have now been closed by regulators. Furthermore, as reported by the Financial Times, the largest banks such as JPMorgan Chase & Co, Bank of America, and Citigroup have seen billions of dollars of inflows within the last week as individuals and corporations alike seek safety within the “too big to fail banks.”

 

How did this happen?

SVB was a poorly run bank that failed to fully measure the risks it was taking within its portfolio. As SVB is not among the Globally Systemically Important Banks it did not face the same level of regulatory scrutiny. These systemically important institutions are held to much higher standards of management as their failure would almost certainly cause a financial crisis. This lack of scrutiny in turn allowed for poor risk management to go unchecked until now. The catalyst for this failure stems from our current aggressive rising rates cycle by the Federal Reserve.

The core client base of SVB consisted of venture capitalists and tech startups. The rapid rise of interest rates caused the market for initial public offerings to slow down significantly and made the private fundraising route far more costly. Thus, many clients began to pull their funds from the bank. This sudden exodus coupled with a poor portfolio that had suffered immense losses due to rising rates created an instant liquidity disaster. SVB attempted to generate the necessary cash and in doing so tanked the stock price of their parent company (Silicon Valley Financial Group) by over 50% on the morning of March 9th. This led to a panic among clients of the bank and resulted in a bank run and subsequently insolvency.

 

What happened to depositors?

The first item to consider is that while equity holders of SVB will face losses and suffer the consequences of their poor investment, the individuals and companies that banked with SVB will be protected and have access to their funds after the government intervened. This raises the question of where said protection will come from and who will pay?

The FDIC has a cap on guaranteed deposits of $250,000 ($500,000 for a joint account with your spouse) which in this case left many depositors underinsured. Thus, the FDIC’s deposit insurance fund has stepped in to ensure people have access to their money. The necessary funds are generated through premiums that banks and savings associations pay for deposit insurance coverage. Therefore, it is important to note that this was not a bailout by the taxpayers, as the Fed aims to avoid that route after 2008.

 

What does this mean for me? And what happens next?

The risk of contagion spreading throughout the banking industry seems to have moderated thanks to the timely intervention by the Fed. Most likely stricter regulations will be imposed on smaller banks such as SVB moving forward. Additionally, these events will lead to greater consolidation within the industry as many individuals and businesses will reconsider where they bank. Keeping your funds safe remains of paramount importance and in the vast majority of cases the bank is one of the most secure options, even during volatile times such as these.

 

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