The Collapse of Silicon Valley Bank
On March 10, the collapse of Silicon Valley Bank (SVB) — the 16th largest bank in the U.S. — sent a ripple effect across the banking world: the aftershock of which resulted in the subsequent failure of New York’s Signature Bank (SB) a few days later. Respectively, these two incidents represent the second and third largest banking failures in U.S. history, following the collapse of Washington Mutual during the 2008 financial crisis.
The Silicon Valley Bank, whose clientele included venture capitalists, startups and tech companies, has been an important benefactor in the banking industry. Since its founding in 1983, SVB has seen a swift rise to prominence over the past four decades, with a bountiful $209 billion in assets and $175 billion in deposits by the end of 2022.
However, these beguiling numbers conceal one serious deficiency which contributed to the bank’s ultimate downfall: the lack of diversity in its clientele.
A stable bank typically has an assortment of clients with varying amounts of deposits. However, in the case of SVB, 90% of its accounts contained deposits more than $250,000, which exceeded the government-insured limit - a characteristic which is especially atypical of such a large bank.
According to Andrew Metrick, Janet L. Yellen Professor of Finance and Management at the Yale School of Management, "This bank would seem perfectly at home in the 1920s or the 1870s: Lots of deposits and a lot of local customers. The very biggest banks have much more diversified client bases, and also somewhat more diversified funding sources. So it wouldn't be as funded as much by deposits."
Likewise, another related causal factor is SVB's increased investment in bonds within recent years. During the pandemic, SVB experienced an influx of deposits, enabling its investors to buy up U.S. Treasury bonds, which generally have long-term, lower interest rates.
But the Federal Reserve’s recent aggressive attempts to curb inflation by raising interest rates dealt a large blow to the value of SBV’s holdings, resulting in its March announcement that the bank would sell its bonds at a loss of $1.8 billion, spurring depositors to quickly transfer money in a classic case of a bank run. On that day alone, SVB shares dropped by more than 60% after clients attempted to withdraw $42 billion from their deposits.
On the following day, the Federal Deposit Insurance Corporation (FDIC) leaped into action and acquired control over SVB, providing its depositors access to their money.
On March 13, President Biden promised that those responsible for the SVB and SB incidents would be held accountable, while also reassuring Americans that "[they] should feel confident that their deposits will be there if and when they need them."
In an attempt to lessen heightened tension within the market and prevent further “contagion” among other institutions, Biden also stressed that "no losses will be borne by the taxpayers… Instead, the money will come from the fees the banks pay into the deposit insurance fund."
Still, Biden faces two difficult challenges in alleviating the banking collapse. As Bill Chappell from NPR states, “The crisis poses both economic and political risks, as the Biden administration balances the twin goals of dampening ripple effects from the banks' failures while avoiding the political spectacle of giving a full bailout to Silicon Valley Bank, which caters to tech firms and venture capitalists.”
The potential for future instability within banking institutions has stirred much debate around the causes of these collapses. Despite Federal Reserve Chair Jerome Powell announcing an investigation on March 13, many lawmakers have put forth their own explanations for these events.
Some Democrats, most notably Senator Elizabeth Warren (D-MA) and Senator Bernie Sanders (D-VT), were quick to assign blame to the Trump administration’s rollbacks of the Dodd-Frank Act, a 2010 law which created new rules for banks and lending practices following the 2008 financial crisis.
Originally, the Dodd-Frank Act supervised banks with assets larger than $50 billion, but following pressure from bank lobbying, it was subsequently pushed to $250 billion. In 2018, Congress scaled back some rules pertaining to smaller and medium-sized banks. The rollback received support from both sides of the aisle, with lawmakers arguing that its regulations were harming local and community banks.
The week following SVB’s collapse, Warren, accompanied by dozens of other fellow Democrats, spearheaded the repeal of the Dodd-Frank Act stating, “"If we hadn't allowed the regulators the discretion to weaken bank regulations, then the regulations would not have been weakened… We need strong stress tests in place. It was a mistake to take them away. We got to put them back."
Republicans, on the other hand, have responded with a warning of caution against such drastic measures, arguing that the Federal Reserve needs further time to investigate before a proper diagnosis and solution can be announced.
Senator Kevin Cramer (R-ND), a member of the banking committee, commented on the issue, stating that "we need to learn a lot more before we apply some broad, sweeping reforms. He also added that “the tendency to rush could be counterproductive," especially when both the House and Senate committees haven’t even held hearings yet, in addition to the necessity of further investigations by the DOJ and the Fed.
Despite harsh criticisms against SVB’s management, Federal Reserve Chair Jerome Powell has declined to comment on whether or not the bank’s collapse was due to improper government policy and oversight. He stated, "It would be inappropriate for me at this stage to offer my views on what the answers might be.”
He also assured listeners that the SVB’s collapse was unusual in nature and not indicative of underlying systemic banking problems.
"These are not weaknesses at all broadly through the banking system,” he said. “This was a bank that was an outlier in terms of its percentage of uninsured deposits and in terms of its holdings of duration risk."
As of writing, further investigations into the matter are still under way, and the necessity for legislative reform in preventing the possibility of further economic debacles is yet to be determined.