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What Is Happening to SVB? Bank Run Fear Spreads as Stock Tumbles

Silicon Valley Bank’s problems were exacerbated by rapidly rising interest rates over the last year, which reduced the value of its bond holdings. Tyrner, whose company works with health care plans to deliver food to underserved communities, said she was surprised to learn about the financial challenges facing Silicon Valley Bank. “Without speaking to any individual entity or person, we will investigate and bring enforcement actions if we find violations of the federal securities laws,” Gensler said in the statement. No one has been accused of any wrongdoing and the person familiar with the matter noted that investigations into a significant event like the failure of Silicon Valley Bank are common in the immediate aftermath. Shareholders in the bank and some unsecured creditors aren’t protected by the guarantees. “Suddenly everyone became alarmed that the bank was short of capital,” says Fariborz Moshirian, professor at UNSW and director of the Institute of Global Finance.

  1. In the lead-up to the Silicon Valley Bank collapse, the Federal Reserve and other central banks had been increasing interest rates as a way to fight global inflation.
  2. One is that another bank acquires SVB, getting the deposits in the process.
  3. Not only did the bank sell assets at a big loss, but it also said that clients’ cash burn rates hadn’t slowed down as anticipated in the current economic climate.

Traders cheered the lack of surprises in the February Consumer Price Index inflation reading and looked ahead to Wednesday’s Producer Price Index, which economists say could show a slowing in wholesale prices. Ahead of the Federal Reserve’s policy meeting next week, investors are keeping a close watch for any signs that inflation is cooling. The appetite to keep raising rates will now be tested if central banks become concerned that SVB’s problems are indicative of a broader weakness in corporate balance sheets caused by rising rates. While Moshirian says he doesn’t think the banking system is about to unravel, he notes that people also initially felt that the sub-prime mortgage crisis was contained. The longer term questions is whether SVB’s vulnerability to rising interest rates is paralleled in other banks through an over-exposure to falling bond prices. Governments and regulators around the world, including in the UK and Australia, are checking for SVB exposure in their corporate and banking sectors.

Regional Banks Try to Smooth ‘Scar Tissue’ of SVB Collapse

SVB calls itself the “financial partner of the innovation economy.” All that basically means it’s tightly woven into the financial infrastructure of the tech industry, especially startups. Regulators shuttered SVB Friday and seized its deposits in the largest U.S. banking failure since the 2008 financial crisis and the second-largest ever. The company’s downward spiral began late Wednesday, when it surprised investors with news that it needed to raise $2.25 billion to shore up its balance sheet. What followed was the rapid collapse of a highly-respected bank that had grown alongside its technology clients.

What triggered the run on the bank?

The bank’s failure served to remind us that there are several weaknesses within the banking system, including the lack of oversight for banks with less than $250 billion in assets. As a result of the Silicon Valley Bank collapse, the government announced the Bank Term Funding Program (BTFP), a program authorized by the Federal Reserve that offers loans to banks, credit unions, and other deposit institutions. In the lead-up to the Silicon Valley Bank collapse, the Federal Reserve and other central banks had been increasing interest rates as a way to fight global inflation. But after the failure of SVB, Signature Bank, and Silvergate Capital, the Fed’s next rate increase was lower than expected prior to the bank failures.

It had become a major player in the tech sector, in which it successfully competed with bigger-name banks. Falvey, who started his career at Wells Fargo and consulted for a bank that was seized during the financial crisis, said that his analysis of SVB’s mid-quarter update from Wednesday gave him confidence. The bank was well capitalized and could make all depositors whole, he said. He even counseled his portfolio companies to keep their funds at SVB as rumors swirled.

In other words, individuals and institutions that owned stock in SVB Financial Group may not get their money back. The FDIC insures bank deposits of up to $250,000 per depositor per bank for each account category. In other words, if you had $250,000 in a Silicon Valley Bank account, you would get all of your money back. Some people believe that Silicon Valley Bank’s failure started far earlier with the rollback of the Dodd-Frank Act, which was the major banking regulation that was put into effect in response to the financial crisis of 2008. Silicon Valley Bank saw massive growth between 2019 and 2022, which resulted in it having a significant amount of deposits and assets. While a small amount of those deposits were held in cash, most of the excess was used to buy Treasury bonds and other long-term debts.

These assets tend to have relatively low returns but also relatively low risk. Fallout from the collapses still has regulators working to install fixes into the system. For example, last week saw reports that the Financial Stability Board was looking into the influence of social media in accelerating bank deposit outflows, as the run on SVB was caused in part by posts on platforms like Twitter (now X). Competition for deposits is still “robust,” Fifth Third Bank CEO Tim Spence told the FT, though banks no longer need to offer terms that are as generous as they were.

Regulators also shuttered another bank, Signature Bank of New York, which had gotten into crypto, and the federal government said its depositors’ money would be guaranteed as well. But not all of Silicon Valley Bank’s problems are linked to rising interest rates. The bank also had a significant number of big, uninsured depositors — the kind of investors who tend to withdraw their money during signs of turbulence. To fulfill its customers’ requests, the bank had to sell some of its investments at a steep discount. On Wednesday, March 8, SVB’s parent company, SVB Financial Group, said it would undertake a $2.25 billion share sale after selling $21 billion of securities from its portfolio at a nearly $2 billion loss.

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While you may not pay for the losses directly with your tax dollars, some losses could ultimately trickle down. For example, if your bank has to pay more for deposit insurance, it might charge you a higher interest rate on a loan or pay you a lower percentage of interest in your savings account. To help, the Federal Reserve announced on March 12 that it would invoke a systemic risk exception, meaning that all depositors would be made whole, even for those funds that were uninsured. Unfortunately, most of the accounts in Silicon Valley Bank held more than $250,000 of deposits, meaning most of the funds were uninsured. In most cases, this would mean account holders would lose any money above that threshold. As this was happening, some of Silicon Valley Bank’s customers—many of whom are in the technology industry—hit financial troubles, and many began to withdraw funds from their accounts.

Other banks are not so precariously positioned as SVB was with its bond investments and exposure to the tech industry. Still, the bank run sparked concerns about the banking sector as a whole. Since last week, shares of all kinds of lenders, including the big banks, have sagged. It used to be that you had to physically go to a bank to withdraw your money — or at least take the psychic damage of picking up a telephone. In this case, digitalization meant that the money went out so fast that Silicon Valley Bank was essentially helpless, points out Samir Kaji, CEO of investing platform Allocate.

So if you are, let’s say, a bank specializing in startups, do you know what ZIRP world does to you? Well, my children, according to the most recent annual filing from SVB, bank deposits grew as IPOs, SPACs, VC investment and so on went on at a frenetic pace. A third of Y Combinator companies won’t be able to make payroll in the next 30 days, according to YC CEO Garry Tan. An unexpected mass furlough or layoff is a nightmare for most companies — after all, you can’t make sales if the salesforce isn’t coming into the office. The next day, the emblematic bank of the tech industry was shut down by regulators — the second-biggest bank failure in US history, after Washington Mutual in 2008. The move caused a wider sell-off in stocks and sparked fears that other banks may be at risk of failure.

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Immediate concerns of widespread contagion have been contained by the US government’s quick response in guaranteeing all deposits of the banks customers. The initial market shock of Covid-19 in early 2020 quickly gave way to a golden period for startups and established tech companies, as consumers spent big on gadgets and digital services. Another possibility is if another bank stepped up to buy part or all of SVB. This happened during the financial crisis, including when JPMorgan Chase absorbed Washington Mutual in 2008. Bloomberg News reported on Sunday that the FDIC is running an auction process for SVB.

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A pandemic that wiped out demand for office spaces, combined with higher interest rates that have made borrowing money more expensive, has delivered a one-two punch to the sector. The mayhem in regional banks reflects the malaise that has gripped America’s commercial property sector, which has a $2.2 trillion mountain of debt due in 2027. Real estate experts have called the market a “slow moving train wreck” with a possible $700 billion default looming on the horizon. On Wednesday, the KBW Nasdaq Regional Bank index saw its worst day since the collapse of Silicon Valley Bank in March, ending the day down by 6%. The decline was led by New York Bancorp, which tumbled nearly 40% on Wednesday after posting a fourth-quarter loss of $260 million due to of sour commercial real estate loans. Stocks in regional banks have gone up by a third in the last three months, even though they haven’t gotten back to their pre-Silicon Valley Bank (SVB) collapse levels.

Now, both banks are both under the control of the Federal Deposit Insurance Corporation, or the FDIC. Another venture investor, TSVC partner Spencer Greene, also criticized investors who “were wrong on the facts” about difference between data and information SVB’s position. We are interested in talking to you about everything happening with the recent spate of tech-related bank closures. By Elizabeth Lopatto, a reporter who writes about tech, money, and human behavior.