“Silicon Valley Bank Collapse a Reminder of Banking System Vulnerability”

Silicon Valley Bank (SVB), one of the top 20 American commercial banks with $209 billion in total assets at the end of last year, collapsed on Friday morning after it failed to raise enough capital to cover its losses.[0] According to the Federal Deposit Insurance Corporation (FDIC), SVB had $209 billion in assets and $175.4 billion in deposits at the time of failure, with more than half of its loans going to venture and private equity firms.[1] The FDIC quickly took control of the bank and set up another bank where depositors could access their money.

The collapse of SVB, the 16th largest bank in the U.S. by assets, came after it announced on March 8 that it had sold $21 billion of assets at a $1.8 billion loss and would sell $1.75 billion worth of shares to plug that hole.[2] The news triggered a panic among key venture capital firms, who reportedly advised companies to withdraw their money from the bank.[3] The next night, depositors tried to withdraw $42 billion, making the bank insolvent.[2]

Experts say the failure of SVB was due to large unrealized losses on government securities, which became a problem when the Federal Reserve raised interest rates and the value of securities dropped. SVB had an atypically large number of uninsured deposits, particularly large accounts over $250,000, which demonstrated its popularity among tech elites.[4] The bank also had a “hyper reliance on uninsured deposits,” which can make a bank inherently less stable since uninsured depositors are more likely to withdraw their money.[5]

The FDIC’s standard insurance covers up to $250,000 per depositor, per bank, for every account ownership category.[6] However, at any given time, the FDIC only has about 1% of bank deposits’ worth of insurance in their fund.[7] Furthermore, in 2018, a bipartisan group of legislators gutted parts of Dodd-Frank, the regulatory-reform law passed after the 2008 financial crisis, and exempted midsize banks like SVB from certain stress tests and capital requirements.[8]

The collapse of SVB is a reminder that the banking system is still vulnerable to sudden banking runs and capital crises, even if the big banks are in better financial shape than small ones.

0. “Silicon Valley Bank collapse and other key moments in the week that rocked banks” NPR, 17 Mar. 2023, https://www.npr.org/2023/03/17/1163911866/5-big-moments-from-the-week-that-rocked-the-banking-system

1. “The collapse of Silicon Valley Bank, explained visually” USA TODAY, 14 Mar. 2023, https://www.usatoday.com/story/graphics/2023/03/13/graphics-bank-collapse-silicon-valley/11466073002/

2. “Silicon Valley Bank’s failure, the government’s depositor rescue, and venture capitalists’ incredible tantrum.” Slate, 13 Mar. 2023, https://slate.com/technology/2023/03/silicon-valley-bank-rescue-venture-capital-calacanis-sacks-ackman-tantrum.html

3. “How does a bank collapse in 48 hours? A timeline of the SVB fall” CNN, 13 Mar. 2023, https://www.cnn.com/2023/03/11/business/svb-bank-collapse-explainer-timeline/index.html

4. “New scrutiny of bank regulators after SVB collapse” The Washington Post, 17 Mar. 2023, https://www.washingtonpost.com/business/2023/03/17/bank-regulation-svb-collapse/

5. “Opinion | The Boys Who Cried ‘Woke!’” The New York Times, 14 Mar. 2023, https://www.nytimes.com/2023/03/14/opinion/silicon-valley-bank-republicans-woke.html

6. “FDIC insurance: Here’s how certain bank deposits are backed by the government” Yahoo News, 13 Mar. 2023, https://news.yahoo.com/fdic-insurance-heres-how-certain-bank-deposits-are-backed-by-the-government-180015108.html

7. “March 2023 Newsletter: A Look at Bank Solvency” Lyn Alden, 13 Mar. 2023, https://www.lynalden.com/march-2023-newsletter/

8. “We Know Who’s to Blame for the Silicon Valley Bank Failure” The Atlantic, 16 Mar. 2023, https://www.theatlantic.com/ideas/archive/2023/03/svb-collapse-fed-regulation-financial-system-safety/673401