The collapse of Silicon Valley Bank, the 16th largest bank in the U.S. by assets, on Friday was the second-largest bank failure in US history and has sent shock waves throughout the banking industry.[0] Founded in 1983, SVB specialized in meeting the credit needs of technology startup companies and venture capital firms.[1] As of December 31st, it had assets to the value of $[2]
The FDIC announced that SVB had $175.4 billion in deposits at the time of failure, and many of its depositors were technology workers and venture-capital backed companies.[3] SVB catered to a strategically important market, but it got into trouble because of large unrealized losses on government securities, which became a problem when the Federal Reserve raised interest rates and caused the value of securities to drop.[4]
SVB had assumed huge interest rate risk, investing something like half of its depositors’ money in long-term mortgage-backed securities and long-term Treasuries at the peak of the bond market and the peak of the Fed’s easy-money policies.[1] As SVB’s customers started to panic, the bank sold some $21 billion of its long-term bond portfolio but soon discovered that these bonds had lost a lot of value and could only be sold at a severe discount.[4] SVB had to sell the debt to Goldman Sachs at a $2 billion loss and more losses were probably on the way if it needed to continue to sell down its portfolio of bonds.[4]
The FDIC provides insurance against deposit losses up to $250,000 which mitigates some of the risk.[5] The Federal Deposit Insurance Corporation (FDIC) only keeps about 1% of the total value of bank deposits in their insurance fund at any given time.[6] Therefore, the FDIC, US Treasury Department, and the Federal Reserve had to step in and provide a combined liquidity backstop on Sunday night to prevent bank runs across small and medium-sized banks.
The collapse of Silicon Valley Bank is seen as a direct result of the 2018 bank deregulation bill signed by Donald Trump and an example of why stricter oversight of banks is important.[7] Furthermore, the failure has highlighted the risks of having a bank with too many large and uninsured depositors and not enough diversification in its investments. Large banks in general are better-positioned, including to take some market share from those smaller banks, but there is still a need to protect the public from systemic banking failures.[8]
0. “Silicon Valley Bank’s Distress Wasn’t Reflected in Credit Ratings” The Wall Street Journal, 17 Mar. 2023, https://www.wsj.com/articles/silicon-valley-banks-distress-wasnt-reflected-in-credit-ratings-93cd9dff
1. “What to Know About Trump-Era Bank Deregulation and Bank Failures” FactCheck.org, 16 Mar. 2023, https://www.factcheck.org/2023/03/what-to-know-about-trump-era-bank-deregulation-and-bank-failures/
2. “If the Feds fail to find big banks to buy SVB and Signature, the likeliest buyers are the one group they don’t want to sell to” Yahoo Life, 17 Mar. 2023, https://www.yahoo.com/lifestyle/feds-fail-big-banks-buy-222917693.html
3. “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/
4. “Two Days in the Valley – Puck” Puck, 15 Mar. 2023, https://puck.news/two-days-in-the-valley/
5. “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
6. “March 2023 Newsletter: A Look at Bank Solvency” Lyn Alden, 13 Mar. 2023, https://www.lynalden.com/march-2023-newsletter/
7. “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
8. “Government fear-mongering over Silicon Valley Bank — and how to profit” New York Post , 15 Mar. 2023, https://nypost.com/2023/03/15/government-fear-mongering-over-silicon-valley-bank-and-how-to-profit/