Silicon Valley Bank, Signature Bank failures ripple across industry

The startling collapse of Silicon Valley Bank and Signature Bank continued to ripple across the US economy even as the US raced to stabilize the banking system.

In an attempt to limit the risk of contagion, the financial supervisory authorities announced on Sunday that they will guarantee all deposits in the banks, while President Biden said that on Monday that “Americans can have confidence that the banking system is safe.” Here’s the latest on the situation.


Feds step in after Silicon Valley Bank and Signature Bank fail

What Happened to Silicon Valley Bank?

Silicon Valley Bank (SVB), the 16th largest US bank with $210 billion in assets, was seized by California authorities on Friday after depositors rushed to withdraw funds due to concerns that the bank could become insolvent. It is the second largest bank failure in US history and the largest since the Federal Deposit Insurance Corporation was forced to take control of Washington Mutual in 2008 during the subprime housing crash.

SVB’s collapse spooked customers at other banks, including customers with deposits that exceeded the FDIC’s $250,000 deposit insurance limit, and raised concerns about possible runs at other financial institutions. Adding to these fears, New York State regulators on Sunday closed Signature Bank — the third largest failure in US banking history.

Another bank, Silvergate Capital, also blew up last week, although it predated SVB’s failure and stemmed from losses linked to the struggles of cryptocurrency clients such as bankrupt FTX and Genesis. The government did not take control of Silvergate, which chose to liquidate.

What is the government doing?

The FDIC, the Federal Reserve and the Department of the Treasury said in a joint statement Sunday that the United States will guarantee deposits from both SVB and Signature.

It’s worth noting that the FDIC is required by law to resolve a failed bank while it moves to protect depositors. The government said SVB customers, most of whom are small and medium-sized technology companies, will be able to tap into their funds from Monday.

The Fed and Treasury also launched a program that would advance capital for up to a year to any federally insured bank eligible to borrow from the central bank. The aim is to allow banks to cover deposit outflows without having to absorb losses on written-down securities, according to Goldman Sachs analysts.

Is the Fed Saving Banks – Again?

The Biden administration quickly took the idea of ​​a bailout for SVB off the table, no doubt sensitive to the optics of Washington once again riding bankers to the rescue, as the Obama administration did during the 2008 financial crisis.

Mr. Biden and Treasury Secretary Janet Yellen said taxpayers will not be on the hook for any losses associated with the disposal of the SVB, to try to allay any concerns that Americans should bear the burden. Instead, the FDIC will handle the costs by using the fees banks contribute to the agency’s deposit insurance fund.

Meanwhile, shareholders of SVB and Signature, along with their unsecured creditors, will lose their money and bank executives will lose their jobs. It is depositors who are saved. That’s what bank regulators are supposed to do when lenders go bust — protect Main Street.

Some Republican lawmakers, including House Financial Services Committee Chairman Patrick McHenry of North Carolina and Senate Banking Committee Ranking Member Tim Scott of South Carolina, were also careful to avoid framing the government’s guarantees for SVB and Signature as a bailout.

Still, some analysts believe Republicans could try to make political hay out of the crisis, noting that the deep blue states of California and New York were home to the two banks.

Why did Silicon Valley Bank fail?

The short answer is that SVB was unprepared for the Federal Reserve aggressively pushing interest rates up.

By industry standards, a disproportionately large portion of the company’s capital was held in long-term investments, including mortgage-backed securities and bonds, according to Bloomberg. As interest rates rose, the value of SVB’s investment portfolio fell, raising concerns about its solvency and prompting the bank’s customers to withdraw their funds.

Many of SVB’s clients were venture capital-backed tech startups that grew rapidly during the pandemic, with significant cash balances they kept with SVB. As interest rates rose and the economy slowed, many of these players burned through their cash, squeezing bank deposits.

It had at least two negative effects for SVB, according to investment bank UBS: First, the bank had to dump securities at a loss to raise capital; secondly, SVB had to record the losses on its balance sheet, which alarmed investors.

By contrast, experts say most regional lenders, as well as the biggest banks, have far more diversified deposit bases.

What will happen to Silicon Valley Bank?

The FDIC struggled to find a buyer for SVB after taking it over, but that effort appears to have failed. Finance Minister Janet Yellen said so “Face the Nation” on Sunday that the FDIC was considering a “range of available options,” including an acquisition of a foreign bank.

Why did Signature Bank fail?

Regulators shut down Signature, a $110 billion commercial bank with offices in California, Connecticut, Nevada, New York and North Carolina, on Sunday as customers alarmed by SVB pulled their money.

On paper, Signature was on solid footing, and as recently as March 9, the company touted its “strong financial position.” But its collapse underlined how quickly panic can grip bank customers, who often shift their assets to big banks when uncertainty flares.

Barney Frank, the former Massachusetts House Speaker and a member of Signature’s board, told the Wall Street Journal that the company failed because of an “SVB-generated panic.”

Is the US banking system safe?

Mr. Biden sought to reassure Americans that the nation’s banking system remains stable, saying that “Your deposits will be there when you need them.”

Banking industry analysts also expressed confidence that the banking system as a whole is safe.

“We believe the events should not have material wider implications for the economy and are not indicative of systemic risks for the banking sector,” John Canavan, senior analyst at Oxford Economics, told investors in a report on Monday.

One of the reasons why this view may be correct: The failures of Silicon Valley Bank, Signature and Silverlake appear to be mainly the result of financial problems specific to each bank – exposure to interest rates at SVB and exposure to losses in the crypto industry at Signature and Silverlake – not systemic problems with US banks.

In other words, these banks collapsed for significantly different reasons than those that struck Lehman Brothers in 2008, as well as the broader lending industry during the subsequent crisis—by issuing risky loans to millions of households and businesses across the country.

Also because of its relatively modest size — by comparison, JPMorgan Chase, the nation’s largest bank, has more than $3 trillion in assets — SVB was not subject to the Fed’s regular stress tests. Major banks in the US (along with smaller institutions in Europe and the UK) are subject to such assessments of their financial health, reducing the odds of a major meltdown.

Still, more individual banks, especially small and regional lenders, may be at risk. Trading in shares of at least a dozen regional banks was halted Monday as jittery investors bailed out of bank stocks. San Francisco-based First Republic Bank, which has $212 billion in assets, lost more than 70% in early trading, while Western Alliance Bancorporation fell 81%, PacWest Bancorp fell 50% and Zions Bancorporation sank 27%.

“While the situation remains in flux, there are good reasons to believe that (SVB’s failure) does not call into question the solvency of the United States or the global financial system in the way that Lehman did,” analysts with Capital Economics said in a report. “But it illustrates the extent to which vulnerabilities lurk in the financial sector and strengthens the case for central banks to be cautious about raising interest rates further as the effects of the tightening of policy so far play out.”

Is the crisis over?

Not yet, although most banking experts and market analysts believe that the immediate financial crisis will pass.

“Currently, markets are not expecting a Lehman Brothers-style panic, and based on existing information, that is a reasonable response,” Eric Vanraes, portfolio manager of the Strategic Bond Opportunities Fund at Eric Sturdza Investments, said in an email. “If we were in a Lehman-style environment, the Fed would have already cut interest rates.”

However, the political repercussions are likely to continue for some time to come. Expect lawmakers to summon bank regulators and industry leaders to Congress to explain what happened and how to support lenders to protect against future bank runs. Yellen is likely to face questions about the situation when she appears before the Senate Finance Committee on Thursday to discuss the Biden administration’s 2024 budget.

A key question is likely to center on whether bank customers across the United States with funds exceeding the FDIC’s $250,000 insurance limit can always expect the government to step in when lenders collapse. While such government backstops can help safeguard confidence in the financial system, critics say it also creates “moral hazard,” prompting bank executives to take the kind of risks that required taxpayer bailouts in 2009.

In the longer term, financial regulators are likely to face pressure to tighten their oversight of regional banks, particularly lenders like SVB with a large share of uninsured deposits. According to analysts at JPMorgan, the level of uninsured deposits at the nation’s biggest banks averages about 43%, but that figure can top 60% for some regional institutions — a risk when lenders collapse.

The potential risk is significant: Overall, about $7 trillion of deposits in U.S. banks are uninsured — 43% of total domestic deposits, the bank noted.

— The Associated Press contributed to this report.

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