It’s been a tumultuous few days for banks since the now-shuttered Silicon Valley Bank announced Wednesday it had suffered a $1.8 billion after-tax loss and urgently needed to raise more capital to quell depositors’ concerns.
By Friday, SVB’s chances of getting access to more funding appeared paper thin. That led the Federal Deposit Insurance Corporation to take over the bank after failed attempts to sell it to healthier banks.
The FDIC announced Friday afternoon that customers who had up to $250,000 per account deposited with SVB, which was the nation’s 16th-largest bank, would have access to their funds by Monday morning. But it wasn’t known at the time what would happen to deposits that exceeded $250,000, the limit the FDIC insures in the event of a bank failure.
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Over the weekend, the Federal Reserve, Treasury Department and FDIC announced that SVB and Signature Bank’s failures posed a big enough risk to the entire banking system that it merited allowing regulators to take the unusual step of guaranteeing the larger deposits.
But the saga doesn’t end there. Here’s what we know so far:
Silicon Valley Bank failure explained
Silicon Valley’s customers, who were largely startups and other tech-centric companies, started becoming needier for cash over the past year. That led them to withdraw money from their accounts.
SVB meanwhile needed to keep selling its assets, mainly bonds, at a loss to free up capital so that customers could withdraw funds. But the bank got to a point where the losses were so high, customers began to fear SVB couldn’t guarantee access to every customer’s funds. That fueled a massive bank run which caused the FDIC to step in.
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How much did SVB have in deposits?
As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits, according to the FDIC on Sunday.
“At the time of closing, the amount of deposits in excess of the insurance limits was undetermined,” it said.
Largest bank failures in U.S. history
The top three bank failures in U.S. history are:
- Washington Mutual, Seattle, Washington: in 2008, with nominal assets at time of failure of $307 billion.
- Silicon Valley Bank (SVB), Santa Clara, California: in 2023, with nominal assets of $209 billion.
- Signature Bank, New York, New York: in 2023, with nominal assets of $118 billion.
Who is buying Silicon Valley Bank?
Early reports suggested PNC Financial, JPMorgan and Royal Bank of Canada were among the suitors for the failed SVB bank, but more recent reports have said PNC has declined and interest from RBC has cooled.
For a mid-sized regional bank, “buying the whole bank would be a very large transaction and a big shift in focus to one area although Silicon Valley is known for very strong relationships in this business,” wrote Vivek Juneja, JPMorgan analyst.
As for Signature Bank, Juneja noted “Signature Bank had ties to the crypto industry, which may limit its appeal to…potential buyers.”
Etsy payments delayed
E-commerce company Etsy, which delayed payments to about 0.5% of its active sellers on Friday after SVB’s collapse, said in a statement that it was working to pay those sellers Monday.
“We’ve already started processing payments via another payment partner this morning,” the statement reads. “Supporting our sellers is our highest priority, and we understand how important it is for these small businesses to be able to receive their funds when they need them.”
Biden blames Trump for SVB failure
President Joe Biden pointed fingers at the Trump administration for the collapse of SVB.
“During the Obama-Biden administration, we put in place tough requirements on banks like Silicon Valley Bank and Signature Bank, including the Dodd-Frank Law, to make sure the crisis we saw in 2008 would not happen again,” he said during a White House address on Monday.
“Unfortunately, the last administration rolled back some of these requirements,” he said, referring to measures former President Donald Trump signed into law in 2018 aimed at helping small and midsize banks compete with larger banks by easing restrictions
“I’m going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely that this kind of bank failure will happen again and to protect American jobs and small businesses.”
Biden says taxpayers won’t foot bill for SVB, Signature Bank
Biden also said that the banking system is safe and Americans can access their deposits after federal regulators took over the two failed banks.
“Every American should feel confident that their deposits will be there, if and when they need them,” Biden said at the White House.
Biden stipulated that “no losses” stemming from the collapse of the Silicon Valley and Signature banks would be borne by taxpayers. He said he would ask Congress and federal regulators to tighten banking rules to make it less likely that a major failure happens again.
Companies impacted by SVB collapse
In addition to Etsy, online game platform Roblox on Friday said it had about 5% of its $3 billion in cash at Silicon Valley Bank, and said the collapse would have “no impact” on its day-to-day operations. The company did not immediately return a request for comment.
Streaming platform company Roku said in a regulatory filing Friday that it had about a quarter of its $1.9 billion worth of cash and cash equivalents held in Silicon Valley Bank.
Roblox and Roku declined to comment further Monday.
What does the Silicon Valley Bank failure mean?
Even if you didn’t have money deposited in SVB, the bank’s failure, the first since 2020 and the second largest on record, matters for the entire U.S. banking system.
Before last week, there was little reason to suspect that you couldn’t withdraw as much money from your bank account as you’d like at any given time.
But as panicked customers rushed to SVB branches and crashed the bank’s site once it became apparent that it was in trouble, many began to wonder if their money was safe where it was deposited.
That fear directly flowed to Signature Bank, contributing to its collapse on Sunday.
Why did Signature Bank fail?
Signature Bank, a New York-based financial institution that became a big lender in the crypto industry, was ordered to close over the weekend. The bank was part of only a handful of financial institutions allowing customers to deposit crypto assets.
That didn’t bode well for the bank when crypto plunged as a result of FTX’s collapse last year.
Signature board member Barney Frank, a former congressman who helped design new financial regulations after the 2008 financial crisis, ultimately blamed SVB for its collapse. “It was an SVB-generated panic,” he told The Wall Street Journal. “We were fine until the last couple of hours on Friday.”
Bank term funding program (BTFP): What is it?
That’s a facility created by the Federal Reserve that allows banks to offer high quality securities such as Treasuries and mortgage-backed securities as collateral for cash at par value, meaning banks can monetize these securities holdings well above the market value.
A problem for SVB was that when companies began withdrawing large amounts of money to fund their businesses, it had to sell its longer-term Treasuries and securities at a loss to cover the withdrawals. The market value of the securities had dropped sharply amid high inflation and aggressive Fed rate hikes to slow it.
Because SVB had to take such a huge loss on the securities, it no longer had enough assets to cover its deposits.
The BTFP “will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress,” the Fed said.
Did Peter Thiel play a part in the collapse of SVB?
Billionaire tech mogul Peter Thiel is seen as having accelerated SVB’s fall after talk circulated Thursday that his Founders Fund venture capital firm asked its companies to move their funds.
VC firms Coatue Management, Union Square Ventures and Founder Collective also reportedly had advised their portfolio companies to pull their money from the bank, while Canaan told its portfolio companies to remove their cash on an as-needed basis, reports said.
This set off panic across Silicon Valley, prompting SVB’s CEO on Thursday to hold a conference call with clients asking them to remain calm.
What businesses will be most affected by SVB’s failure?
Tech and crypto businesses.
“The fact that the collapses have principally been in the tech and crypto spaces suggests that these sectors are even more at risk than the economy as a whole” wrote Brad McMillan, chief investment officer at broker-dealer Commonwealth Financial Network. “While other banks will likely move to replace SVB, they will not be as focused or as dedicated to the sector, which will slow things down going forward. One of the primary enablers of the tech boom is now gone.”
Bank failures: What does it mean for overseas markets?
European markets slid amid banking concerns as financiers pulled an all-nighter to rescue SVB’s U.K. arm. In the end, HSBC UK acquired SVB U.K. for £1 ($1.21), in a deal that excludes the assets and liabilities of SVB U.K.’s parent company. That allowed customers of SVB U.K. to bank as usual.
There were also “a large number of startups and investors” who had “significant exposure to SVB UK,” Dom Hallas, executive director of Coadec, which represents British startups, said on Twitter. He cited “concern and panic.”
Asian stocks were mixed.
What’s the “moral hazard”?
“This has created a moral hazard for the Fed; there will be an expectation for it to step in even if a bank gets into trouble in the future for any other issues,” wrote JP Morgan analyst Vivek Juneja.
But most economists agree with former U.S. Treasury Secretary Lawrence Summers who said in an interview on Friday “I don’t think this is a time for moral-hazard lectures or for talk about teaching people lessons.”
Is the U.S. Treasury also providing support?
Yes, the Treasury is backstopping the Fed, which is allowing banks to use their high-grade securities as collateral at face value for cash for one year. The Treasury will make up to $25 billion available as a credit-risk backstop to the Fed.
Fed officials said, however, that they do not expect to have to use any of that money, given that the securities posted as collateral have a very low risk of default.
Fed interest rate decision: Will SVB, Signature Bank cause Fed to pause rate hike?
Most economists say no, but it could at least slow down the Fed’s interest rate plan to cool inflation.
Some economists are betting the Fed will pause its aggressive campaign of interest rate hikes because of the risks the Silicon Valley Bank crisis poses to the financial system. Other say the central bank is still laser focused on fighting inflation and will follow through with a rate increase next week, though probably by a quarter point rather than a half point.
The bank failures have tightened lending for now, and if it continues, it does some of the Fed’s work to slow the economy.
However, this also could pull forward the timeline for a recession, which many economists predicted in the latter part of the year.
“Expect to see banks and the financial sector as a whole pull back on lending and risk until they get their houses in order, and this will slow economic growth and likely pull markets down.” Commonwealth chief investment officer Brad McMillan wrote. “In some respects, this is good (it is what the Fed has been aiming for), but it makes a recession much more likely, quite possibly in the short term.”
–Medora Lee and Paul Davidson
Fed launches review of supervision and regulation of SVB
The Fed plans to “conduct a careful and thorough review of how we supervised and regulated this firm, and what we should learn from this experience,” said Fed Vice Chair Michael Barr.
The “thorough, transparent, and swift review” will be publicly released by May 1, the Fed said.
Why did First Republic Bank and Western Alliance shares drop so much?
First Republic Bank shares led the slump in banking stocks on Monday after the bank said Sunday it had tapped additional liquidity from the Federal Reserve Bank and JPMorgan Chase & Co. It said the move raises its unused liquidity to $70 billion, before any funding it could get from the new Fed BFTP facility.
Even though the bank’s founder Jim Herbert and CEO Mike Roffler said in a statement the bank’s “capital and liquidity positions are very strong, and its capital remains well above the regulatory threshold for well-capitalized banks,” shares stumbled almost 62% as investors worried more banks could fail.
Western Alliance also said in a statement it’s seeing “moderate” outflows and it had taken additional steps to strengthen its liquidity. Its shares closed down 47%.
Regional banks and those with large uninsured deposits were hardest hit in the sell off.