When Silicon Valley Bank collapsed on Friday, it created the second largest bank failure in U.S. history.
Here’s how it all fell apart:
As the bank became the 16th largest in America, SVB invested its funds in long-term bonds when rates were near zero.
It may seem like a good idea at the time, but when interest rates rose, long-term bond prices fell, squeezing their investments.
On Wednesday, SVB announced that he suffered an after-tax loss of $1.8 billion and urgently needed to raise more capital to address depositors’ concerns.
The market reacted strongly and SVB lost over $160 billion in value in 24 hours.
As the stock fell, depositors moved quickly to withdraw cash from the bank.
Banks only carry a fraction of depositors’ money in cash – called a fractional reserve. This meant that SVB could not give their money to depositors because it was held in these long-term bond investments which were no longer worth as much.
In short, SVB did not have the liquidities necessary to fulfill its obligations towards its customers. As the panicked withdrawal continued, a bank run was underway.
SO the Federal Deposit Insurance Corporation took over SVB on Friday for depositors to have access to their money by Monday, and because the bank’s problems posed a major risk to the financial system.
This is the kind of action represented by the “FDIC Insured” sign you may have seen at your local bank.
It was not just depositors who took their assets away from the bank.
Bloomberg reports that SVB CEO Greg Becker sold $3.6 million worth of company stock less than two weeks before the company disclosed the steep losses that led to his demise and that Peter Theil founder’s fund withdrew millions by Thursday morning.
SVB had $209 billion in assets and $175.4 billion in deposits at the time of failure, the FDIC said in a statement. Many SVB depositors were tech workers and venture capital-backed companies.
“That’s why venture capital exists in the first place,” said Calvin Henderson, investment analyst at Canada’s National Angel Capital Organization. “It provides long-term risk capital that traditional investors won’t provide.”
But it was ultimately the government, not the investors, that came to the rescue of the depositors.
Before the FDIC stepped in, depositors could only access $250,000, the insurance limit on their accounts, but several companies had far more than that amount in the bank, including popular companies like Roblox and Etsy. .
The Federal Reserve, Treasury Department and FDIC said regulators took the unusual step of guaranteeing deposits because SVB posed a major risk to the US economy.
Signature Bank in New York, was also closed on Sunday after his customers started withdrawing money too quickly. State regulators said they took over the bank to stabilize financial systems. Federal regulators said depositors at both banks will get their money.
The fallout from the Silicon Valley Bank bankruptcy prompted President Joe Biden to address taxpayer concerns from the White House today.
“Americans can have confidence in the security of the banking system,” Biden said at the White House. “Your deposits will be there when you need them.”
The ripple effect of SVB in numbers: How the Collapse Affects Other US Banks
Contributors: George Petras, Stephen Beard, Elisabeth Buchwald, Francesca Chambers and Shawn J. Sullivan.