You’ve probably already heard the news: Silicon Valley Bank (SVB), a trusted and reputable bank popular with tech startups and venture capital firms, collapsed on Friday. Its swift and relatively unexpected failure (predicted by only a few) is the second largest in U.S. history, shadowed only by the demise of Washington Mutual Bank in 2008 during the financial crisis. So what does this mean for the average person? Should you be concerned about your money and the financial health of the bank you use? Let’s consider this in more detail below.
Why exactly did Silicon Valley Bank fail?
Like most banks, SVB kept a small amount of its deposits in cash and bought long-term debt (like Treasury Bonds) with the rest. When interest rates were low, this was a solid strategy that resulted in modest but consistent returns. But as the Federal Reserve began raising interest rates to combat inflation in March 2022, the value of these investments dropped.
Around this time, amidst a volatile stock market and mass tech layoffs, late-stage tech startup investing had begun to dry up. This led many of the bank’s clients (who were primarily VC-backed technology and life science companies) to withdraw their funds, which meant SVB had to sell some of its long-term investments at a steep discount to fulfill the requests.
On Wednesday, March 8, 2023, the bank announced these losses (to the tune of $1.8 billion), panic ensued, and there was an old-fashioned run on the bank. By Friday, regulators stepped in and shut down the bank due to the size of its investment losses and all the simultaneous withdrawals. The swiftness of SVB’s fall from grace (and solvency) has stunned many.
Are other banks going to fail now too?
While it remains to be seen how SVB’s failure will impact other banks, New York-based Signature Bank, which catered to wealthy business managers and was also widely used by cryptocurrency companies, collapsed over the weekend. Only days earlier, Silvergate, another crypto bank, also closed down. So, the question remains, do these failures mean that the bigger banks that are commonly used by regular folks are in trouble?
U.S. Treasury Secretary Janet L. Yellen assured the public on Monday that the American banking system was stable and resilient. Meanwhile, larger banks like Wells Fargo, Bank of America, JPMorgan, and Citigroup, appear to be more insulated from their industry’s current woes. Why? In comparison to banks like SVB and Signature, their deposit bases are extremely vast, and their capital requirements are generally more stringent (e.g., they’re required to hold cash against even safe investments like Treasury bonds, which helps ensure they have the liquidity necessary if a lot of people withdraw their money at once). Their assets tend to be more diversified, and they usually steer clear of investing in riskier investments like cryptocurrencies.
So while the idea of bank runs is a scary one – perhaps bringing to mind George Bailey in It’s a Wonderful Life – retail customers can take some solace in the fact that the Federal Deposit Insurance Corporation (FDIC) insures bank deposits up to $250,000, and larger banks generally have plenty of cash on hand due to regulatory requirements. Unfortunately, for many of SVB’s clients, tech startups with millions of dollars in the bank, these facts might not be of any help, but we’ll all have to wait and see how the rest of the story unfolds.