In what NPR is calling the “second largest bank failure since 2008”, Silicon Valley Bank(SVB) reported a one billion dollar loss causing the FDIC to swiftly come in and take over the bank. SVB is a tech-startup lender and bank, which amounted to America's 16th largest bank holding around 209 billion dollars in assets across 17 branches in California and Massachusetts. They have funded companies such as Shopify, Pinterest, Fitbit, and many more companies. This was a simple bank run that happened on Friday afternoon causing mass panic and the eventual collapse of the bank. Back in 2021 during the height of Covid Tech, startups parked their money in SVB, so SVB decided to put the money into long-term bonds. As interest rates have gone up in time since then, the bonds have underperformed. This year as tech companies have seen slower growth, they have been withdrawing more money causing SVB to sell off its bonds at a huge loss. The “herd following”(NYT) and fast pace nature of SVB’s clientele is what experts believe triggered the bank run. Making long-term investments was not a smart decision for the bank who caters to risky depositors that want capital very quickly.
As The FDIC takes over, they have assured that all deposits below 250K are insured and accounts will have access to them by Friday. But according to NPR only 3% of the accounts at SVB have amounts that are below the 250K benchmark that the FDIC insures. In a statement from FDIC, they announced that all uninsured depositors will receive a certificate of deposit, and will receive their money once SVB’s assets have been sold. So far the government has not shown interest in buying the bank, leaving analysts to believe it will be absorbed into a larger bank and the issue being resolved shortly. Experts believe that this is an isolated incident unlike the events of 2008, all other banks are reporting strong capital. This comes as a major blow to tech startups across the country, and to the future of entrepreneurs. Many are questioning how tech startups in the future will find a bank that is willing to take them on.
https://www.fdic.gov/news/press-releases/2023/pr23016.html
https://www.nytimes.com/2023/03/11/technology/silicon-valley-bank-failure-lessons.html
https://www.npr.org/2023/03/11/1162805718/silicon-valley-bank-failure-startups
8 comments:
This is certainly an alarming and unfortunate incident, but it is good to hear that other bans are not exhibiting this type of risky behavior. It is great that the FDIC insures up to 250K, but they aren't really helpful in this situation given the scale of most deposits. I am interested in what would happen if the government or a larger bank bought SVB. I imagine it would be painful to see millions of dollars go up in flames for a bank's reckless behavior.
It is clear that the collapse of Silicon Valley Bank has led to an expansion of protections for bank deposits in the US, with the Biden administration making clear that all deposits in Silicon Valley and Signature banks, insured or uninsured, would be available to customers. This raises questions about whether all uninsured bank accounts in the US, worth trillions of dollars, are effectively guaranteed by taxpayers. Treasury officials have stated that they are currently only focused on addressing the current issue and stabilizing the banking system, assuring uninsured depositors that they will be made whole. Biden claims that these recent failures will have little risk to the US economy, though we are seeing the immediate repercussions in the tech sector of the market. We have to just wait and see…
https://thehill.com/business/3897813-five-things-to-know-about-the-silicon-valley-bank-takeover/#:~:text=The%20federal%20government%20took%20over,capitalists%20and%20high%2Dtech%20startups.
The dual need for banks to both provide a safe space to deposit funds while also making profit to sustain themselves is what led to this. It's a shame that banks have to risk their clientele's assets in order to ensure they have the money to continue operating. At the same time, banks play a crucial role in growing the economy through their investments. This situation emphasizes the need to both secure deposits in banks, while also ensuring a level of investment that is not too risky but not constricting of growth. Thankfully, only one bank was affected, but in the future, a tradeoff must be made to ensure that situations like these can either be prevented or accounted for.
Confidence in the banking system is a requirement for a functioning economy. If businesses do not think their money is safe in the bank beyond the $250,000 FDIC limit, they will be reluctant to keep any funds above this in any banks other than the very largest banks, which would have the effect of putting most smaller and mid-sized banks out of business over time. Also, a significant bank failure where depositors lose their funds has not happened in the recent past, as even in the financial crisis of 2008, the government guaranteed all bank deposits as they knew that doing anything otherwise would destroy the economy. Depositors are not investors - they are not putting money in the bank to take a risk. This is why the government had to step in quickly and guarantee the deposits of Silicon Valley Bank (SVB) and also Signature Bank. Banking is also about confidence, as few banks could handle a situation where a large portion of their investors all wanted to pull their money out at once, which occurred at SVB. That is why the government had to step in and quickly restore confidence – to avoid runs on other smaller and mid-sized banks. Whether the situations at SVB and Signature Bank were isolated incidents or the first of more issues to come remains to be seen.
SVB's failure comes as a pretty alarming surprise. It certainly scared people, especially those negatively affected by the last bank crashes of 2008. However, this time, it seems to only be SVB that has failed, not a larger-scale issue. It is also interesting to see the 250k insurance from the government going into effect. We learned about this policy last year in APUSH and how it was originally a new-deal policy. However, it is interesting to me why anyone would put more than 250k in one bank instead of spreading out their money so that if the bank goes under, the losses are minimal.
@Jayden Yan
Since SVB's collapse, a lot has happened in the tech and banking industry. The startup world is re-thinking banking, and 69 billion dollars have been lost thanks to SVB's collapse. Credit Swiss failed last week and if not for a buyout from UBS(a german bank), 10 billion more would have been lost worldwide. There are more domestic impacts as well, as seen by the lack of confidence in First Republic Bank which received 30 billion from America's top banks. While the effects of the collapse are starting to subside, I believe the banking industry will need to evolve and become more transparent. It is up to regulators and both regional/international banks to step up and solve this huge issue.
https://www.bloomberg.com/news/newsletters/2023-03-28/svb-credit-suisse-crises-trigger-distressed-debt-increase
https://www.cnbc.com/2023/03/25/banking-crisis-deposit-drain-from-small-banks-into-jpm-wfc-c-slowed.html
SVB's collapse has really brought a lot more awareness towards the bank systems in place. Personally I had a scholarship set in this bank so when I heard the news it was incredibly concerning and it made me research more about other banks as well as past bank failures. It's also really interesting to hear that only 3% of the people who had money in this bank are confirmed to receive their money while others lost large amounts of money. This truly is an example of how fragile the banking system is and it's disappointing to known how much money was lost in the process but it's definitely a wake up call on how handling large amounts of money (+250000)in a single bank can be dangerous.
It's unfortunate that banks must put their customers' assets at risk in order to guarantee their ability to pay their bills. Banks also significantly contribute to the expansion of the economy through their investments. This issue highlights the need to protect bank deposits and provide an investment level that is both reasonable in risk and growth-friendly. Fortunately, just one bank was impacted, but a tradeoff needs to be made going forward to make sure that occurrences like these can either be avoided or taken into account.
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