The Fall of Silicon Valley Bank : Second Largest Bank Failure in US History

The Fall of Silicon Valley Bank

On Tuesday, March 14, the newly formed Silicon Valley Bridge Bank announced that the bank is “open for business” after Silicon Valley Bank’s recent seizure by regulators, which marked the second largest bank failure in U.S. history.

According to a statement on the bank’s website, Tim Mayopoulos has been appointed as the CEO of the newly established Silicon Valley Bridge Bank, N.A. by the Federal Deposit Insurance Corporation (FDIC). Depositors can now access their funds without any restrictions, and both their existing and new deposits are fully insured by the federal government, as stated by Mayopoulos.

In his message, Mayopoulos also encouraged customers to “help us rebuild our deposit base, both by leaving deposits with Silicon Valley Bridge Bank and transferring back deposits that left over the last several days.”

Mayopoulos, the former head of mortgage financier Fannie Mae, succeeds former SVB CEO Gregory Becker.

According to an announcement made on March 12 by the FDIC, the Federal Reserve, and the Treasury Department, individuals with SVB holdings that surpass the Federal Deposit Insurance Corp. (FDIC) limit will still be able to access the full amount of their deposits.

To avoid creating panic that could lead to bank runs at other institutions and adversely affect the U.S. financial system, regulators made the exceptional decision to safeguard uninsured deposits. On March 10, Silicon Valley Bank in Santa Clara, California, collapsed, becoming the largest bank failure since the 2008 global financial crisis. The technology-focused bank had recently disclosed substantial losses and failed to raise funds or find a buyer.

The FDIC’s primary function is to safeguard deposits at its affiliated banks in case they encounter financial difficulties. However, regulators are breaking their norm by providing coverage for both insured and uninsured funds at SVB. The standard FDIC policy is to provide insurance coverage up to $250,000 per depositor, per ownership category, per FDIC-insured bank.

New bridge bank created

The FDIC had transferred all deposits and some assets from the failed SVB to the newly formed bridge bank, Silicon Valley Bank, N.A., which is operated by the federal agency.

As a result, individuals with deposit accounts and loans with the failed bank automatically became customers of the new bridge bank. They can continue to access their funds using ATMs, debit cards, and writing checks in the same manner they did prior to the bank’s collapse, according to the FDIC’s announcement.

The FDIC has established a bridge bank for Signature Bank, a crypto-focused bank that was closed by regulators on March 12 due to a run on deposits following the failure of SVB two days earlier. Similar to Silicon Valley Bridge Bank, the newly created entity will take on Signature Bank’s assets and liabilities until a buyer is found or the failed bank is liquidated. Customers of Signature Bank will continue to have access to their accounts through the bridge bank via ATMs, debit cards, and check-writing as before.

Silicon Valley Bank Financial Group files for bankruptcy

SVB Financial Group, the parent company of Silicon Valley Bank, filed for Chapter 11 bankruptcy protection on March 17. The bankruptcy filing will involve liquidating the company’s assets to pay its creditors. The company has reported having approximately $2.2 billion of liquidity and $3.3 billion in unsecured debt. The company stated that SVB Capital and SVB Securities, which are its venture capital arm and investment bank, respectively, are not included in the filing and will continue to operate as normal.

The new financial institution created by the FDIC after the collapse of Silicon Valley Bank, Silicon Valley Bridge Bank, N.A., is not affiliated with SVB Financial Group. William Kosturos, the Chief Restructuring Officer for SVB Financial Group, said that the Chapter 11 process would allow the company to preserve value as it assesses strategic options for its valuable assets, particularly SVB Capital and SVB Securities.

What Silicon Valley Bank and Signature Bank failures mean for consumers

According to Mina Tadrus, CEO of Tampa, Florida-based investment management company Tadrus Capital, negative effects of a bank failure like SVB or Signature on clients and investors may include “a decrease in overall account settings, liquidity issues when needing quick access to funds, and potential difficulty transferring funds to other banks depending on withdrawing/transfer limits.”

Tadrus added that any losses might extend to a variety of businesses in the financial industry and result in instability within institutional banking systems because many hedge fund firms used these banks as their primary banks for operations.

When banks like SVB and Signature fail, the consequences affect more people than just their depositors. Etsy, an online marketplace that utilised SVB to process payments for some of its sellers, informed the merchants in an email that the bank’s failure was causing delays in payment processing. Over 2,700 Etsy sellers experienced brief issues in the days after the disaster.

In order to keep the business afloat, Camp, a venture-backed retailer, sent emails to its customers urging them to make purchases. The toy vendor offered the “BANKRUN” promo code for a 40% discount on purchases.

Many individuals and small business owners without any connections to the collapsed SVB or Signature Bank nonetheless worry about the American financial system and general economy as a result of these bank failures.

The markets stopped trading in a number of bank equities on March 13, the first trading day after both regional banks fell, due to volatility. First Republic Bank, PacWest Bancorp, Regions Financial, and Zions Bancorporation were the affected banks.

Following the SVB and Signature failures, even shares of major banks, such Wells Fargo, JPMorgan Chase, and Citigroup, declined.

On March 13, The New York Times reported that several anxious clients of numerous regional banks around the country hurried to withdraw their savings. The following day, President Joseph Biden made broadcast comments in an effort to comfort Citizens. Americans can have confidence in the security of our financial system and your deposits, Biden stated. Let me further reassure you that we won’t stop here; we’ll take further action if necessary.

Taxpayers won’t have to bail out collapsed banks

Both insured and uninsured accounts at the two failed banks will be accessible, but no public losses would be incurred, as the FDIC underlined in its announcement and Biden said in his broadcast remarks on March 13.

Instead, Biden stated, “the funding will come from the fees that banks pay into the Deposit Insurance Fund.” This fund is made up of the premiums that banks pay for deposit insurance coverage on a quarterly basis.

Treasury Secretary Janet Yellen also stated that bank fees were the source of the money used to cover depositors at the two collapsed banks in her statement on March 16 in advance of a Senate Finance Committee hearing. Crucially, no tax dollars are being spent or at risk with this measure, according to Yellen.

In their announcement on March 12, the Fed and the Treasury stated that the goal of their emergency measures to protect insured and uninsured deposits at the two collapsed banks was to “strengthen public trust in our banking system.” According to the statement, maintaining consumer and small company access to deposits and loans contributes to “strong and sustainable economic growth.”

Silicon Valley Bank history

In 1983, two former Bank of America managers created SVB, which thereafter started offering financial services to Silicon Valley’s emerging technology companies. It first went on the stock market in 1987.

As of December 31, 2022, the startup-focused lender has about $209 billion in assets and $175 billion in deposits, according to the FDIC. By the time the bank closed for the day the evening before federal regulators closed it down, customers had made withdrawal attempts totaling $42 billion.

The COVID-19 epidemic had left the bank rich with cash, and it invested a sizeable sum on Treasury bonds. The Fed’s interest rate increases, which started in February 2022, caused these bonds to lose a significant amount of their value. In order to handle all of the withdrawals, the bank was compelled to sell its assets at a significant loss due to this and the rush of depositors wanting their money back.

According to Arthur Weissman, co-founder of Miami-based financial services company Industry FinTech, “when consumers withdrew money, the bank needed to sell assets to supply the necessary liquidity.” But, a bank that holds bonds and asset-backed securities will probably incur a loss when forced to sell those assets in an environment with rising interest rates.

At the time of its collapse, SVB was the 16th-largest bank in the United States. Currently, it ranks second only to Washington Mutual’s failure in 2008 as one of the largest bank failures in American history.

Leave a Comment