Last Friday, a combination of imprudent decision-making and panicked customers led to the collapse of Silicon Valley Bank (SVB), a 40-year-old financial institution based in Santa Clara, California. The Federal Deposit Insurance Corporation (FDIC) stepped in to prevent further fallout, putting nearly $175 billion in customer deposits under the regulator’s control. SVB’s meltdown represents the second largest bank failure in U.S. history, and the largest one since the 2008 financial crisis. As a result of this chaotic situation, stock prices for other regional banks plummeted at the start of this week. For instance, First Republic Bank saw the value of its shares drop by 60 percent in a single day while the Arizona-based Western Alliance endured a 45 percent drop.
How did the downfall of one bank lead to all of this turmoil? Although SVB’s collapse last week was swift and sudden, experts say that problems have been brewing at the bank for years. With billions of dollars in the vault from tech industry venture capitalists, SVB invested the vast majority of its deposits while only keeping a fraction on hand. This strategy worked well until the Federal Reserve raised interest rates, which slowed down funding for startups to a trickle. Companies began to withdraw more and more cash from SVB, causing it to sell assets to keep up with the influx of redemption requests. “It’s the classic Jimmy Stewart problem,” said former FDIC chair Sheila Bair, referring to the actor’s role in the film “It’s a Wonderful Life” where he tries to prevent a bank run. “If everybody starts withdrawing money all at once, the bank has to start selling some of its assets to give money back to depositors.”
Unfortunately for SVB, it could not handle the sheer number of withdrawal requests and would have broken down entirely if not for the FDIC’s intervention. Although customers with deposits of up to $250,000 (the maximum covered by FDIC insurance) will have their accounts made whole, the New York Times reports that “there’s no guarantee that depositors with larger amounts in their accounts will get all of their money back.” Instead, these customers will receive certificates for their uninsured funds that will be paid back once the FDIC recovers money from SVB. While all of this upheaval has brought back bad memories of 2008 for many investors, share prices for big banks like JP Morgan and Citigroup have stayed stable. According to Bair, investments at these large institutions are far more wide-ranging than regional banks: “I don’t think that this is an issue for the big banks — that’s the good news, they’re diversified.”
- What are some of the factors that caused Silicon Valley Bank to collapse?
- Do you agree with the FDIC’s decision to bail out Silicon Valley Bank in order to prevent further financial fallout? Why or why not?
Sources: Emily Flitter and Rob Copeland, “Silicon Valley Bank Fails After Run on Deposits,” The New York Times, March 13, 2023; Joe Rennison, “Bank Shares Tumble in Wake of Failures,” The New York Times, March 14, 2023.