US regulators rush to limit banking contagion after Silicon Valley Bank’s collapse
Silicon Valley blues (Justin Sullivan/Getty Images)
From ski resort to last resort… Earlier this month Silicon Valley Bank hosted a “snow summit” for tech CFOs at the Deer Valley ski resort in Utah. Last week, SVB tried to borrow from the Fed — a lender of last resort — to avoid collapsing (spoiler: it still collapsed). Here’s a high-level recap of the second-largest bank failure in US history:
- Who: Silicon Valley Bank was the go-to for tech startups, servicing about half of America’s venture-backed tech companies.
- Rise: SVB was flooded with deposits in 2021 as startups easily raised venture cash in an extra-low-interest-rate environment, parking their funds at SVB.
- Problem: Banks largely make $$ by making loans, but SVB’s clients were already flush with cash. Plus, interest rates on loans (especially short term) were super low.
- “Solution”: To earn a slightly higher interest rate on its loans, SVB invested most of its deposits into US Treasury bonds with long durations (think: 10+ years).
- Risk: If interest rates soared, the value of SVB’s bond portfolio would plunge (because its old bonds would be paying out at lower interest rates).
- Result: Interest rates did in fact soar. The market value of SVB’s bonds plummeted by $15B (and its savvy customers paid attention).
- Re-tweet: SVB’s close-knit clients chatted and pulled their cash out at the same time (on Thursday alone, they tried to withdraw $42B — a quarter of SVB’s total deposits).
- Reckoning: SVB ultimately couldn’t meet withdrawal requests, the FDIC took control and declared it insolvent, and panic ensued (Signature Bank also failed).
Pulling out all the (back)stops… To avoid more bank runs, regulators announced an emergency backstop to ensure that all depositors at both failed banks would have access to all their funds (as of yesterday). The Fed is also creating a “Bank Term Funding Program” to offer loans to financial institutions who present high-quality securities (think: Treasurys) as collateral — instead of having to fire-sell securities during times of stress.
- The FDIC guarantees customer deposits of up to $250K at every insured bank, but most of SVB’s and Signature Bank’s deposits were uninsured (think: tech companies with way more than $250K). Still, the FDIC said it would make all depositors at these two banks whole, regardless of account size.
Panic can be a self-fulfilling prophecy… which is why the government is taking extraordinary measures to contain the damage. The three banks that failed this month (including Silvergate) had an unusually high concentration of deposits from tech and crypto companies. Regular folks weren’t likely to have accounts there, and regular folks are also less likely to have uninsured deposits (aka: $250K+ in one account). Still, if companies are at risk of losing millions in deposits, then people are at risk of losing paychecks — and damage control could continue to be key to containing further contagion.