In a shocking turn of events, Silicon Valley Bank (SVB), once the 16th largest bank in the U.S., faced a catastrophic collapse in March 2023.
What led to this dramatic Silicon Valley Bank collapse, and how did federal regulators respond?
Let’s unravel the details and understand the impact on depositors, investors, and the broader economy.
What you'll learn:
➤ Silicon Valley Bank collapse
SVB’s Sudden Closure
SVB, headquartered in Santa Clara, California, was closed by the California Department of Financial Protection and Innovation on March 10, 2023.
The bank’s demise resulted from a combination of plummeting investments, massive depositor withdrawals, and mismanagement, as per a Federal Reserve report.
Historical Significance
SVB’s collapse was the largest since the 2008 financial crisis, raising concerns during an already uncertain economic climate.
Federal regulators acted swiftly to assure depositors, promising to make all depositors whole, even those beyond FDIC protection limits.
Overview of Silicon Valley Bank
SVB, a subsidiary of SVB Financial Group, served as a prominent business bank, especially catering to startups and venture-backed firms.
Founded in 1983 during a poker game, SVB experienced substantial growth, becoming the 16th largest bank with assets of $209 billion in December 2022.
Rapid Growth and Risky Investments
SVB’s growth between 2019 and 2022 resulted in significant deposits and assets.
The bank’s reliance on long-term debts and Treasury bonds became problematic as interest rates rose, making its bonds riskier.
Trigger Events Leading to Collapse
SVB’s customer base, primarily in the technology sector, faced financial troubles, leading to substantial withdrawals.
To cover these withdrawals, SVB sold investments at a loss, marking a $1.8 billion deficit that proved fatal for the bank.
Regulatory Oversight and Rollback of Dodd-Frank Act
The rollback of the Dodd-Frank Act in 2018 affected SVB’s regulatory oversight, allowing it to escape additional scrutiny despite being the 16th largest bank.
Government Intervention and Bank Term Funding Program
Federal regulators intervened to instill confidence in the banking system, promising to protect all depositors.
The government introduced the Bank Term Funding Program (BTFP) to provide loans and stability to financial institutions.
Timeline of Collapse
March 8 to March 26 witnessed a rapid sequence of events, from SVB’s announcement of losses to its acquisition by First Citizens Bank.
Impact on Depositors and Investors
FDIC insured all depositors, even those with amounts exceeding the standard $250,000 limit, to prevent contagion and maintain consumer confidence.
However, investors, including stockholders and unsecured debt holders, may face losses.
Costs and Funding of the Rescue
The FDIC estimated the cost of SVB’s failure to be around $20 billion, covered by the agency’s Deposit Insurance Fund.
While taxpayers won’t directly bear the losses, potential indirect impacts on financial institutions could occur.
➤ Final Thoughts
The Silicon Valley Bank collapse serves as a stark reminder of vulnerabilities in the banking system.
Swift government action aimed at safeguarding depositors and implementing measures like the Bank Term Funding Program highlights the commitment to maintaining stability in the aftermath of a major financial institution’s failure.
The incident prompts reflection on regulatory oversight, the impact of economic policies, and the interconnectedness of the banking landscape.
References
- Bank Failures in Brief – Summary 2001 Through 2023 – Federal Deposit Insurance Corporation.
- Status of Washington Mutual Bank Receivership – Federal Deposit Insurance Corporation.
- Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank – Federal Reserve.
- Large Commercial Banks; As of December 31, 2022 – Federal Reserve Statistical Release.
- Venture-Funded – Silicon Valley Bank.
- Silicon Valley Bank Celebrates 20 Years of Dedication to Entrepreneurs – Silicon Valley Bank.
- Large Commercial Banks; As of December 31, 2019 – Federal Reserve Statistical Release.
- SVB Financial Group Announces Proposed Offerings of Common Stock and Mandatory Convertible Preferred Stock – SVB Financial Group.
- The $50 Billion Threshold in the Dodd-Frank Act: Key Findings – Congressional Research Service.
- S.2155 – Economic Growth, Regulatory Relief, and Consumer Protection Act: Abstract – U.S. Congress.
- Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank – Federal Reserve.
- Rating Action: Moody’s Downgrades SVB Financial Group (Senior Unsecured to C From Baa1) and Will Withdraw the Ratings – Moodys.
- Silicon Valley Bank Scrambles to Reassure Clients After 60% Stock Wipe-Out – Reuters.
- In the Matter of Silicon Valley Bank: Order Taking Possession of Property and Business – Department of Financial Protection and Innovation, State of California.
- SVB Financial Group (SIVB) – Yahoo Finance.
- Joint Statement by Treasury, Federal Reserve, and FDIC; March 12, 2023 – Board of Governors of the Federal Reserve System.
- FDIC Creates a Deposit Insurance National Bank of Santa Clara to Protect Insured Depositors of Silicon Valley Bank, Santa Clara, California – Federal Deposit Insurance Corporation (FDIC).
- SVB Financial Group Commences Chapter 11 Proceeding to Preserve Value – Cision PR Newswire.
- First-Citizens Bank & Trust Company to Assume All Deposits and Loans of Silicon Valley Bank N.A., From the FDIC – Federal Deposit Insurance Corporation.
- HSBC Acquires Silicon Valley Bank UK Limited – HSBC Holdings plc.
- Deposit Insurance FAQs – Federal Deposit Insurance Corporation.
- Financial Products That Are Not Insured by the FDIC – Federal Deposit Insurance Corporation.
- Deposit Insurance Fund – Federal Deposit Insurance Corporation.
- Semiannual Monetary Policy Report to Congress – Federal Reserve.
- Open Market Operations – Federal Reserve.
- Bank Term Funding Program – Board of Governors of the Federal Reserve System.
- When a Bank Fails – Facts for Depositors, Creditors, and Borrowers – Federal Deposit Insurance Corporation.
- What Is a Credit Union? – National Credit Union Administration.
- SVB Financial Group: Shareholders – CNN Business.
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