You’ve had to have heard by now that the second-largest U.S. bank collapse in history occurred last week when Silicon Valley Bank collapsed in less than two days. There’s been some ripple effects of it and two other bank collapses you might not have heard of. I’ll see if I can run it down for you.
July 21, 2010: The Dodd–Frank Wall Street Reform and Consumer Protection Act is passed in response to the Great Recession that started in 2007. It sets up conditions to make banks more robust and stable. One of these is to make sure banks have funds on hand to cover deposits
May 24, 2018: President Trump rolls back a lot of these rules via the Economic Growth, Regulatory Relief and Consumer Protection Act, removing a lot of regulation from banks and reducing how often they have to perform stress testing to survive financial issues.
During the COVID-19 pandemic, tech companies do really well because of everyone shifting to teleworking whenever possible.
Silicon Valley Bank, which had a pretty big presence servicing the tech sector, starts getting a lot more deposits. At the end of 2022, they had $209B in total assets, with $175.5B in deposits. Most of the deposits (86.4%) were uninsured.
Since interest rates were kept low (almost zero in many cases) during the time of the pandemic, SVB looks for a way to be able to offer customers a better rate. SBV uses most of the money being deposited to buy long-term Treasury bonds and reduces how much they have on hand to cover deposits.
2022: The interest rates on long-term Treasury bonds and other interest rates slowly start climbing.
The startup companies banking with SVB begin making withdrawals to cover business expenses.
Silvergate Bank in California, which had some dealings involving cryptocurrency, is hit when several of them start dropping in price and FTX goes bankrupt. Three U.S. Senators (Elizabeth Warren, Roger Marshal, John Kennedy) want Silvergate to explain its relationship to FTX in December 2022.
Likewise, Signature Bank in New York, which had 30% of its deposits in the form of cryptocurrency, is also hit with losses due to cryptocurrency decreasing.
At the end of 2022, the “unrealized losses” of the Treasury bonds held by SVB exceeds $15B. An unrealized loss is what you’ll lose when you sell them at the current value.
Early in March 2023, SVB is informed by Moody’s Investors Service that they were looking at downgrading SVB’s credit rating due to the unrealized losses.
March 8, 2023: SVB announced they sold $21B worth of investments, borrowed $15B and would hold an emergency stock sale to raise $2.25B. They lose almost $2B by selling those items.
March 8: Moody’s downgrades SVB’s credit rating, despite SVB’s steps to boost their finances.
March 8: Silvergate announces they’ll wind down operations and liquidate.
March 8: Venture capital firms urges their portfolio companies to withdraw their deposits from SVB because they’re concerned about a bank run happening.
March 9: The bank run happens due to the VC firms creating a self-fulfilling prophecy by saying “Get out before it does”. SVB customers withdraw $42B by the end of the day, leaving it in the red by $958 million.
March 9: SVB’s stock plummets. Trading is halted the following morning.
March 10: Examiners from the Federal Reserve and the Federal Deposit Insurance Corporation show up to see what’s going on. Hours later, the California Department of Financial Protection and Innovation took possession of SVB and appointed the FDIC as the receiver. FDIC creates a new bank in order to re-open SVB’s branches on Monday the 13th and opens an auction to get a buyer for SVB.
Over the weekend, no buyer is found. SVB employees are notified they will be let go in 45 days. Salaried employees will get a 50% raise and hourly employees get double pay for any overtime.
March 12: The Treasury, Federal Reserve and FDIC announce all depositors would be “made whole” (get their deposits back).
March 12: The New York State Department of Financial Services closes Signature Bank, citing “systemic risk”.
The tally: SVB becomes the second-largest bank in the U.S. to collapse, only behind Washington Mutual in 2008 with their $307B in assets at the time. Signature Bank is third. Silvergate’s place on the list hasn’t been determined yet.
That is a lot to take in. As mentioned, it looks like SVB customers won’t be hit as hard as initially thought.
Let’s look at the ripple effects, including from right after the collapse happened.
Some companies couldn’t meet their payroll because of the money they had in SVB.
The CAMP toy/apparel/experience retailer had most of their cash assets in SVB. CAMP offered a “BANKRUN” promo code to get 40% off purchases to boost sales. They were also okay with people not using the code.
Among SVB’s customers was a winery. So they didn’t just work with tech firms.
Roku said $487M of their almost $2B in cash was at SVB.
Crypto lender BlockFi, which filed for bankruptcy in November, said it has $227M in SVB.
Aerospace manufacturer Rocket Lab had about $38M (8%) of its cash in SVB.
Despite the collapse and closure of two other banks, the actions of the FDIC look to have made it less likely that other banks would be directly impacted enough to have to close or to collapse.
The more diversity a bank has in its investments, the better they can handle it.
Treasury Secretary Janet Yellen ruled out a federal bailout for SVB.
The Deposit Insurance Fund, which is going to be used to help pay back SVB customers, gets its funding from fees assessed on financial institutions and interest on government bonds. So U.S. taxpayers don’t have to be hit to help fix this situation.
Another cryptocurrency called USD Coin that was pegged to the U.S. dollar (using it as a reference point) dropped after the company that runs it announced they had $3.3B of their $40B in cash (8%) in SVB.
Other U.S. banks also have unrealized losses totaling $620B.
SVB has been criticized for failing to upgrade its technology and not being able to improve the security of its mobile banking app. Some companies had to switch to a different bank because of problems at SVB.
SVB had exclusivity clauses with some of its clients, limiting how much the clients could diversify where they had their money.
Calls are being made to rollback Trump’s rollbacks of the Dodd-Frank Act.
Elon Musk was open to the idea of buying SVB, but one investor didn’t like the idea because it would likely involve Musk selling more Tesla stock.
Trump is already spreading doom and gloom, saying more collapses will happen, even though it can arguably be said that he is responsible for it happening.
And finally, if you’ve got a half hour, you can watch Linus at Linus Tech Tips work through the ramifications of the SVB collapse and how it affects other companies.
Bank makes risky investments to return greater than average interest to investors. Investments go to shit, as most do on an off and on basis, and bank fails to adjust in a timely manner. Investors, depositors, lose money, insurance and federal funding makes them whole again.
I mean, yes, but no. Fees on institutions are fees on customers. And once you take the money out it makes it harder to fix the next problem and makes a bail out more likely.
Lessons learned by investors, depositors, looking for an easy buck… none. Doesn’t seem like SVB was doing anything actually shady, except being sloppy, but if you remove the risk then companies will continue to pay banks to do this and they will keep intermittently failing. The customers are the ones enabling this, and they hardly ever take the big hits. It’s like arresting only drug dealers and giving back the drug users money.
I know my thinking on this is super simplistic. But our current way of handling these things doesn’t properly distribute risk and consequences.
I don’t think SVB did anything shady, either. They made decisions that were reasonable at the time and bad luck bit them. About the only thing I can think of is when they were thinking, “We can go as low as X in cash on hand to cover deposits under the new rules”, it would have been better if they followed it up with “Let’s not go quite that far so we have more of a buffer”. However, this may be investigated to see if the decisions were made properly.
Sometimes I may over-simplify a description just to cover a point and move on to the next.
I agree, I don’t think this was a S&L kind of issue. They were taking larger risks for larger returns and everything almost hit all at once. And then the people who fed the quarters into the slot machine are getting all their money back.
