The Federal Reserve has made funds available to other banks in an attempt to prevent another collapse in the financial sector.
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The Federal Reserve has made funds available to other banks in an attempt to prevent another collapse in the financial sector.
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A Silicon Valley bank that served many of the world’s most powerful technology investors collapsed on Friday and was taken over by federal regulators. The largest US bank to fail since the 2008 global financial crisis.
Then, on Sunday, regulators became concerned about the financial health of New York’s Signature Bank, largely due to its large exposure to the volatile crypto market.
Now, both banks are regulated by the Federal Deposit Insurance Corporation, or FDIC.
Regulators announced the takeover of the Silicon Valley bank late last week after it effectively ran, as depositors rushed to withdraw tens of billions of dollars worth of deposits.
The collapse has sent shock waves across the financial sector. Shares of smaller, regional lenders have been hammered; The stock market fluctuated wildly; Now, pressure is on the Federal Reserve to withdraw its interest rate even as inflation persists.
It’s a lot to keep track of. Here’s what you need to know.
What is Silicon Valley Bank?
While not a megabank like Goldman Sachs or JPMorgan Chase, Silicon Valley Bank punched well above its weight during its 40-year history.
Based in Santa Clara, Calif., SVB’s clients include venture capital firms, startups and wealthy tech workers. It became a major player in the technology sector, successfully competing with big-name banks.
“They’ve really created a niche that’s the envy of the banking space,” said Jared Shaw, a senior analyst at Wells Fargo. “They can provide all the products and services that these sophisticated technology companies, as well as these sophisticated venture capital and private equity funds, need.”
Among its clients were technology and technology-adherent companies such as Roku, Roblox and Vox Media. (It turns out that this concentration in the tech industry was key to its demise.) But it was little known outside tech circles—until last week.
Why did Silicon Valley Bank collapse?
Silicon Valley Bank’s business boomed during the pandemic as tech companies flourished. The bank’s customers filled its coffers with deposits totaling more than $100 billion.
In 2021, when interest rates were at record lows, the cash-rich SVB invested billions of dollars in long-dated US Treasuries. Those bonds backed by the US government are generally considered safe, modest investments. But they pay in full only when they mature; Otherwise, long-term bonds risk losing value if interest rates rise.
That’s exactly what happened in 2022, when the Federal Reserve began aggressively raising interest rates in an attempt to control rampant inflation. Those rate hikes affect the value of government bonds, including those in SVB.
“The problem was they weren’t worth 100 cents on the dollar because they were long-term interest rates. Interest rates went up. They had to sell them at a discount,” said Douglas Diamond, a finance professor at the university. Chicago, in an interview with NPR. “And it could have been avoided if the supervisors had said, ‘Look, we realize that interest rates are likely to rise.'”
This is not a problem as long as SVB does not need the money. But the tech sector as a whole has been on a downward spiral in recent months, and companies have increasingly started withdrawing their deposits from the bank.
To make good on that withdrawal, SVB had to sell part of its bond holdings at a loss of $1.8 billion, the bank said last week. That announcement spooked the bank’s customers, who worried about SVB’s credibility and then proceeded to withdraw even more money from the bank — a textbook definition of a bank run.
On Thursday alone, customers tried to withdraw a collective $42 billion in deposits, and SVB’s stock fell more than 60%. At noon Friday, SVB was taken over by the FDIC.
Traders on the floor of the New York Stock Exchange on Monday. Bank stocks, particularly for regional banks, fell after the acquisitions of SVB and Signature Bank.
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Traders on the floor of the New York Stock Exchange on Monday. Bank stocks, particularly for regional banks, fell after the acquisitions of SVB and Signature Bank.
Michael M. Santiago/Getty Images
What does this mean for other banks?
SVB, with its bond investments and exposure to the technology sector, is less vulnerable than other banks. However, the banking movement raised concerns about the banking sector as a whole. Since last week, shares of all types of lenders, including big banks, have fallen.
Shares of other banks that may share some of the risk, such as SVB, also fell on Monday, with First Republic Bank down more than 60% and Western Alliance Bancorp down nearly 50%. Investors feared that other lenders, particularly smaller and regional lenders, would face a similar surge in withdrawals and struggle to meet redemptions.
Even traditional banks have taken a hit: JP Morgan is down more than 7% since last week, while Wells Fargo and Bank of America are both down more than 15%.
Earlier last week, Silvergate, a California-based bank that caters to the cryptocurrency industry, announced plans to wind down its operations.
On Sunday, regulators ordered the takeover of Signature Bank, which expanded into the crypto space in 2018 and withdrew $10 billion on Friday after SVB’s troubles began. Crypto has been hit hard since last year.
Longer-term, the broader banking sector remains healthy, analysts say.
Bank analysts at Morgan Stanley said in a note late last week that SVB’s problems were “highly unique and should not be attributed to other regional banks”.
“We want to be very clear here,” they wrote. “We do not believe there is a liquidity crunch facing the banking industry.”
Wells Fargo analyst Shaw also said other banks were hit by panic selling. “It’s a fear that’s really gripped the market and is self-perpetuating at this point,” he said.
What will happen next for those who had contact with SVB and Signature Bank?
Federal officials say all of SVB’s customers will have full access to their deposits — even accounts holding more than $250,000, the limit of FDIC insurance. Accounts holding more than that amount made up the majority of accounts at SVB. The move guarantees $175 billion in customer deposits at SVB.
Deposits at Signature Bank will also be stopped, they said. Both banks resumed operations on Monday, allowing account holders to access their funds.
This means that companies that rely on cash deposits in the SVB for their day-to-day operations – to generate payroll, for example – can continue as usual.
Shareholders and some creditors may not be protected, the FDIC says. Senior executives have been sacked.
What happens next for everyone else?
Central authorities are taking steps to prevent the “contagion” from spreading to other banks. “The banking system is safe,” President Biden said in remarks Monday morning. “Your deposit will be there when you need it.”
The Federal Reserve Board provides financing to other institutions to help them increase their cash reserves, which can help prevent another bank disaster.
However, markets responded strongly on Monday. The US stock market has been volatile over the course of the day. Government bonds rallied as investors sought safer investments.
The impact was most felt on 2-year Treasury yields, which generally reflect investors’ expectations of where interest rates are headed. That yield has fallen a full point since the middle of last week, from above 5% to below 4%.
All this comes just ahead of next week’s Federal Reserve meeting, where the Fed will announce whether it will raise its benchmark interest rate again.
Rapid interest rate hikes by the central bank over the past year have helped curb inflation. But these increases have devalued bond stocks, which SVB invested billions in and helped trigger its collapse last week.
Before last week’s SVB decline, markets had expected the central bank to raise interest rates by half a percentage point at its March meeting. Now, with the Fed under some pressure to ease hikes, those expectations have receded.
“Obviously, we don’t know the results of all the recent, very rapid increases other than what we’re starting to see in the banking industry. And I think the Fed needs to step back and look at the results. Their handiwork before things get worse,” Barry Ritholts, president of Ritholts Wealth Management, told NPR. .
