International reporter Apostolos Kaniouras explains how and why the Silicon Valley Bank went bankrupt.
On March 10, 2023, Silicon Valley Bank (SVB) collapsed after a combination of poor investment decisions and the US government’s attempts to stabilize the economy. The result was the second-largest bank failure in US history, with a loss of two billion dollars in sold assets and an estimated $20 billion in deposit insurance payouts.
Why did it collapse?
Like any other bank, SVB kept a small part of their depositors’ money in its vaults and invested the rest in debt, like U.S. treasuries and mortgage-backed securities, which they regarded as a safe investment with good returns at the time. However, due to the Federal Reserve increasing interest to combat inflation, the assets SVB bought last year greatly decreased in value. SVB executives had to decide whether they would sell their bonds at a lower price than initially estimated and lose money, or keep their bonds and wait until they had fully made their money back. The bank would have opted for the latter. However, that was impossible due to the nature of SVB’s clients. SVB specializes in financing and backing venture capital for start-up companies, particularly in the technological sector. Start-ups have experienced difficulties in the last year due to the COVID-19 pandemic and thus venture capital is drying up. As a result, they have begun to tap into funds deposited in SVB, the primary bank in the tech sector. For this reason it was impossible to hold onto long term bonds when customers demanded quick access cash to their accounts. The day after SVB announced that they had sold their bonds at a lower rate, the banks’ shares had fallen 64% in pre-market trading and many of SVB’s clients had already decided to withdraw their money. Most SVB clients are large companies, it is assumed most of them exceeded the $250,000 deposit limit on deposit insurance and thought that they had to take out their money as fast as possible. In the banking world, this is termed a bank run and it is one of the few ways a bank can collapse within days. Seeing the imminent collapse, bank regulators seized control of SVB’s assets and deposits that remained in the bank.
What was the government’s response?
Although the Federal Deposit Insurance Corporation (FDIC) seized control of SVB’s assets, billions of dollars had already been lost. President Joe Biden held a press conference explaining the actions his administration will take to remedy the losses. “The bottom line is this, Americans can rest assured our banking system is safe,” President Biden stated. He reassured SVB depositors that “all customers of those banks will have access to their accounts” and that “no losses will be borne by the taxpayers, everything will be paid by the fees the banks pay on the deposit insurance fund.” Finally, President Biden made clear that he will try to strengthen the rules banks have to follow to prevent future collapses. He pointed out that such regulations were strong until the last administration voted on rolling back the Dodd-Frank financial reform act, thus burdening taxpayers with greater liability if the financial system collapsed. Finally, the FDIC issued a statement announcing that all depositors of SVB will be reimbursed no matter what their losses were. Hopefully, this event will not only act as a lesson for the government but also for the depositors, many of whom deposited amounts larger than those insured by the FDIC in single accounts.
“The bottom line is this, Americans can rest assured our banking system is safe”
– President Joe Biden