Collapse of Silicon Valley Bank leaves financial world with uncertainty

Vincent Perretti

SVB Financial Group, once one of the world’s leading banks in the technology sector, collapsed due to a capital shortage, resulting in the bank’s closure and takeover by federal regulators on March 10.

SVB, which did business as Silicon Valley Bank, provided banking services to nearly half of the U.S. technology sector with assets amounting to $220 billion in March 2022, according to CNN.

Banks have two sources of funds that act as their safety net: capital and debt.

Capital is the money a company or business needs to function and expand. This funding includes cash and other assets.

Debt is the money a consumer incurs by borrowing money from the bank.

SVB had poured billions into long-term U.S. government bonds. These bonds were widely considered one of the safest investments, and at the time, interest rates were favorable.

But, when the Federal Reserve aggressively hiked interest rates due to the economy, the value of these bonds fell. As a result, SVB began to sell off all its bonds at a loss of $1.8 billion to negate its capital shortage, according to CNBC.

Investors and consumers lost confidence in the bank, resulting in a mass withdrawal of assets. The bank’s stock plummeted by about 60%, leading to its collapse.

The Federal Deposit Insurance Corp. is an independent government agency whose mission is “to maintain stability and public confidence in the nation’s financial system.”

SVB is ensured by the FDIC, meaning depositors are covered up to $250,000 for each account.

The agency is currently attempting to ensure U.S. investments are safe while looking at alternatives to get the bank back on its feet.

In a joint statement between the Federal Reserve, FDIC and the U.S. Treasury Department, the agencies noted that they were taking initiatives to “fully protect all depositors.”

“Depositors will have access to all their money starting Monday, March 13,” the statement read. “No losses associated with the resolution of Silicon Valley Bank will be borne to the taxpayer.”

Additionally, to mitigate the impact with other governmental agencies, the Fed announced the launch of the “Bank Term Funding Program.”

According to a press release from the Fed, this initiative will allow banks the option to borrow directly from the central bank to avoid having to sell assets off at a substantial loss. The Fed added that it will “be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell off those securities in times of stress.”

“Regulators probably needed to do what they did to prevent potentially chaotic damage across the economy,” Harvard professor Jason Furman, who is a former director of the National Economic Council of the United States, tweeted. “But make no mistake–it does have an expected cost to taxpayers.”

SVB’s collapse marked the largest banking failure in the nation since the 2008 financial crisis. The news sparked a banking crisis among consumers and investors.

“There’s no doubt in my mind: There’s going to be more,” former FDIC Chair William Isaac told Politico. “How many more? I don’t know. How big? I don’t know. Seems to me to be a lot like the 1980s.”

Isaac’s ripple effect theory came following the collapse of Signature Bank and Silvergate Capital Corp.

Signature Bank was a New York regional bank and a leading lender in the cryptocurrency industry, with assets amounting to $110 billion according to Fortune. New York State regulators closed the bank on March 12.

Conditionally, Silvergate Bank, which is another primary cryptocurrency bank lender whose assets amounted to $11 billion, announced it would seize operations after its stock plunged 36%.

The Street cited the overreliance on specific sectors of the economy and a lack of a diverse portfolio as major factors of these collapses.

In comparison, bigger banks do not rely on one sector of the economy and have risk management teams in place.

SVB did not have a risk management team or a chief risk officer until January, two months before its collapse.

Despite distinct reasons behind these banks’ failures, studies have shown that an estimated 186 banks have the same chance of collapsing due to potential interest rate hikes. Additionally, researchers said the values of those banks’ assets, such as bonds and mortgage-backed securities, would dwindle, according to MarketWatch.

“I think all markets are in for a volatile time in the short term,” Ilya Volkov, CEO of the financial technology platform YouHolder, told Forbes. “Even though Silicon Valley Bank is a regional bank, the news surrounding it presents a lack of confidence in the banking sector.”

Banks will continue assessing their next moves, especially in light of the Fed’s announced interest rate hike from its March 22 meeting.

“This is going to be the most momentous Fed meeting in recent memory because the next move is so significant, and we don’t know what it’s going to be said,” CNBC’s Jim Cramer said. “We just don’t know if it’s enough to outweigh the bad from the snowballing banking crisis.”