What Caused the Silicon Valley Bank Collapse?
On Wednesday, March 8th, after the markets closed, Silicon Valley Bank announced that it was selling $21 billion of bonds. By Monday, March 13th, the bank had collapsed, and regulators took over, while shares of regional banks had plummeted. What happened?
At the onset of the COVID pandemic in March 2020, the tech sector experienced a boom, boosting investment in tech startups. Silicon Valley Bank's deposits ballooned from $60 to $200 billion. SVB invested the surplus of funds into safe assets such as government bonds and mortgage-backed securities in the form of long-duration bonds.
Then in 2022, those investments in tech startups quickly dried up, draining accounts at Silicon Valley Bank, and the deposits sharply declined. SVB was stuck with those long-duration bonds.
A long-duration bond has a maturity date ranging from 10 to 30 years. Because the investor's money is tied up for a more extended period, long-duration bonds typically offer a higher yield or interest rate than shorter-term bonds. For example, if you buy a long-duration bond at a 1.5% or 2% interest rate and the interest rate increases to 5 or 6%, you are stuck with a low-yield bond for the duration.
On Wednesday, March 8th, after the market closed, SVB announced that it was selling $21 billion of bonds and would lose $2 billion. It also announced it would try to raise money by selling more stock. Although SVB said it would raise $2.25 billion in funds, it assured customers and investors that it would pull through. However, this t did not reassure customers. Investors contacted their startups and instructed them to pull money out of SVB.
On Thursday, March 9th, tech startups scrambled to withdraw their funds. Without access to their bank accounts, companies couldn’t make payroll or pay their overhead expenses. Word spread throughout the industry, causing a classic bank run. Customers tried to withdraw $42 billion worth of deposits, more than SVB could handle.
On Friday, March 10th, the Federal Deposit Insurance Corporation (FDIC) seized the bank. It wasn’t clear whether SVB’s collapse was a singular event or indicative of a more significant problem in the banking industry. Customers were losing trust in the banking system, and that panic could lead to a more significant economic crisis. So regulators stepped in.
On Sunday, March 12th, regulators from the Federal Reserve, FDIC, and the Treasury Department shut down Signature Bank, which catered to the crypto industry. Regulators also told customers whose balances were above the federally insured limit that they would get all their money back.
On Monday, March 13th, before the markets opened, investors dumped their shares in regional banks similar to SVB.
Is it a bailout? Depends. Shareholders will be wiped out, and the federal government will not rescue the owners. In that sense, it is not a bailout. However, regulators are coming to the rescue of uninsured depositors by giving them their money back. So it is a bailout for those uninsured depositors.
Who’s at fault? One could argue that SVB is at fault. The Federal Reserve started raising interest rates in March 2022 and has been clear about its intention to stay on that trajectory. SVB should have foreseen this when it invested in long-duration assets. One could also argue that federal regulators are at fault. Although SVB looked good on paper, something was fundamentally wrong for it to collapse in this manner.
Will more banks fail? It’s too soon to say. The tech boom and bust during the pandemic was unique to the tech industry. However, psychology is a powerful force. If consumers lose faith in banks, more failures may arise.
Source: "Can the Government Contain a Banking Crisis?", The Journal, WSJ Podcasts, 03.13.23.
