Some of the comment below has come from The New York Post.
On Friday, Silicon Valley Bank, a lender to some of the biggest names in the technology world, became the largest bank to fail since the 2008 financial crisis.
Silicon Valley Bank provided banking services to nearly half of the country’s venture capital-backed technology and life-science companies, according to its website, and to over 2,500 venture capital firms. Its swift collapse has sent shock waves through the tech industry, Wall Street and Washington.
Here’s what we know so far about this developing story and what brought Silicon Valley Bank to this point.
In a nutshell, the bank took on too many huge deposits, and it was caught by higher interest rates.
Flush with cash from start-ups, Silicon Valley Bank did what most of its rivals do: It kept a small chunk of its deposits in cash, and it used the rest to buy long-term debt like Treasury bonds. Those investments promised steady, modest returns when interest rates remained low. But they were, it turned out, short-sighted. The bank hadn’t considered what was happening in the broader economy, which was overheated after more than a year of pandemic stimulus.
This meant that Silicon Valley Bank was caught in the lurch when the Federal Reserve, looking to combat rapid inflation, started raising interest rates. Those once-safe investments looked a lot less attractive as newer government bonds offered higher rates of interest. You may remember from some of my previous e-mails, the relationship between Bond prices and interest rates – higher interest rates in the wider economy hit Bond prices hard as the fixed income offered from each previously issued Bond becomes less attractive; the Bonds can stll be traded, but at much lower prices.
In what would ultimately spell trouble for the bank, start-up funding was also starting to dwindle, leading Silicon Valley Bank’s clients, a mixture of technology start-ups and their executives, to begin withdrawing their money. To meet its customers’ requests, the bank had to sell some of its Bond investments at a steep discount. This obviously undermines the financial security of the bank, depending on the value of its remaining investments.
But not all Silicon Valley Bank’s problems are linked to rising interest rates. The bank was unique in ways that contributed to its rapid demise. The Federal Deposit Insurance Corporation only insures amounts up to $250,000, so anything more than that would not have the same government protection. Silicon Valley Bank had a significant number of big and uninsured depositors — the kind of investors who tend to withdraw their money during signs of turbulence.
Once Silicon Valley revealed its huge loss last Wednesday, the tech industry panicked, and start-ups rushed to pull out their money.
By late last week, Silicon Valley Bank was in free fall. The Federal Deposit Insurance Corporation (FDIC) announced on Friday that it would take over the 40-year-old institution, after the bank and its financial advisers had tried — and failed — to find a buyer to step in. The takeover put about $175 billion in customer deposits under the control of the federal regulator.
The bank’s failure has raised concerns about other institutions.
Silicon Valley Bank is small compared with the nation’s largest banks — its $209 billion in assets pales next to the more than $3 trillion at JPMorgan Chase. But bank runs can happen when customers or investors panic and start pulling their deposits. Perhaps the most immediate concern late this week was that the failure of Silicon Valley Bank would scare off customers of other banks.
Shares of both First Republic Bank, which is based in San Francisco, and Signature Bank in New York were down more than 20 percent on Friday. But shares of some of the nation’s largest banks like JPMorgan, Wells Fargo and Citigroup did not suffer the same fate, and even nudged higher on Friday.
Since the weekend Signature Bank has also been taken under the protective wing of the FDIC.
Secretary of the Treasury Janet Yellen, Federal Reserve Board Chair Jerome Powell, and FDIC Chairman Martin Gruenberg released a joint statement on Sunday evening outlining what they say are decisive actions to protect the US economy and strengthen public confidence in the banking system.
“After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors,” the statement reads.
“Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”
A similar systemic risk exception has also been put in place for Signature Bank of New York.
Viewers of the BBC will also know that the govt. here in the UK, has brokered a deal allowing HSBC to purchase SVB UK, protecting the investments and cashflows of many of the UK’s tech startup companies.
The speed of response both in the US and in the UK clearly demonstrates that lessons have been learned from the 2008 Financial Crisis, confidence in the financial system is sacrosanct and must be preserved at all costs. In a way this rather renders the deposit protection schemes ($250k in the US and £85k in the UK) somewhat redundant. In the end, govts. know they cannot allow customer facing financial institutions to fail because the risk to the overall financial system would be too great.
The Financial Crisis and the response to it, should have made the whole system much safer, so how can it be that SVB has been allowed to invest to heavily in govt. Bonds? Where was the oversight? Essentially SVB was gambling with its clients’ money that interest rates would remain permanently low. Economics 101 and a cursory glance at the history books should have exposed the naivety of this position.
Market movements today will tell us how successful the interventions have been, but with all depositors protected, it should be business as usual, following perhaps a little volatility.
It will be interesting to see whether the problems caused by the rapid rise in interest rates will cause the Fed and the Bank of England to slow down the pace of rises, even in the face of stubbornly high inflation.
I hope you have found this helpful but, if you have any questions about this piece or any other finance related matter, please do not hesitate to get in touch.
Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
