Newsman: The Silicon Valley Bank collapsed on Friday and was taken over by federal regulators. On Sunday, regulators grew concerned about the financial health of New York’s Signature Bank, largely because of its big exposure to the volatile crypto market.
Now, both banks are both under the control of the Federal Deposit Insurance Corporation, or the FDIC.
Silicon Valley bank created so many of the world’s most powerful tech investors but becoming the largest U.S. bank to fail since the 2008 global financial crisis.
Regulators announced the takeovers after what was effectively a run on Silicon Valley Bank late last week when depositors rushed to withdraw tens of billions of dollars worth of deposits.
President Joe Biden attempted to assuage nationwide worries about Silicon Valley Bank’s downfall late last week, promising that taxpayers would not bear the brunt of the largest economic collapse in the U.S. since the 2008 financial crisis.
“Americans can have confidence that the banking system is safe. Your deposits will be there when you need them,” Biden said in a speech Monday morning. “Small businesses across the country that deposit accounts that these banks can breathe easier knowing they’ll be able to pay their workers and pay their bills, and their hard work and employees can breathe easier as well.”
depositors breathed a sigh of relief on Sunday when federal authorities stepped in, agreeing to backstop all depositors for Silicon Valley Bank and Signature Bank — a New York-based bank that also suffered a run on Friday — and to prevent runs on any other financial institutions.
Silicon Valley Bank’s depositors would have access to all their money on Monday, the Treasury Department, Federal Reserve and FDIC promised. The president confirmed that in his speech, saying “every American should feel confident that their deposits will be there if and when they need them.”
The Fed also said it would offer cash loans of up to a year for any bank putting up safe collateral. In theory, that would allow banks to handle deposit withdrawals of any amount as authorities seek to reassure people that they don’t need to take their money out at all.
Federal officials say that all customers of SVB will have full access to their deposits — even accounts that held more than $250,000, the limit of FDIC insurance. Accounts holding greater than that amount made up the vast majority of accounts at SVB. The move essentially guarantees the $175 billion that was in customer deposits at SVB.
Deposits at Signature Bank will also be backstopped, they said. Operations at both banks resumed Monday, allowing account holders access to their funds.
That means that companies who relied on cash deposits at SVB for their day-to-day operations — to make payroll, for instance — should be able to carry on as normal.
Shareholders and some debt holders will not be protected, the FDIC says. Senior management has been removed from their jobs.
During the four-minute speech, Biden emphasized that taxpayers would not pay for the bank’s mistakes, explaining that money will come from the fees that banks pay into the FDIC’s Deposit Insurance Fund to cover the damage. Those who contributed to the collapse, he added, will be reprimanded.
“The management of these banks will be fired. If the bank is taken over by FDIC, the people running the bank should not work there anymore,” Biden said.
Investors are out of luck, too, Biden said: “Investors in the banks will not be protected. They knowingly took a risk, and when the risk [doesn’t] pay off, investors lose their money. That’s how capitalism works.”
Progressives have already begun to signal plans to use the collapse as a cudgel to force reforms, a point cemented by Biden toward the end of his remarks.
“I’m going to ask Congress, the banking regulators, to strengthen the rules for banks to make it less likely this kind of bank failure would happen again,” Biden said, mentioning the Trump administration’s rollback of Obama-era regulations on banks.
The president’s remarks come in the weekend when U.S. regulators worked to find a buyer for the bank, which held more than $200 billion in assets mostly for tech startups and venture capital firms. Federal regulators scrambled to close Silicon Valley Bank when it experienced a bank run late last week.
The collapse has sent shockwaves across the financial industry. Shares of small, regional lenders have been hammered; the bond market has swung wildly; and now, the pressure is on the Federal Reserve to dial back its interest rate increases even as inflation persists.
Based in Santa Clara, Calif., SVB’s clients included venture capital firms, startups and wealthy tech workers. It had become a major player in the tech sector, in which it successfully competed with bigger-name banks.
The bank’s customers filled its coffers with deposits totaling well over $100 billion.
In 2021, when interest rates were at record lows, the cash-rich SVB invested billions of dollars into long-term U.S. Treasury bonds. Those bonds, which are backed by the U.S. government, are generally considered to be safe, modest investments. But they pay out in full only when they’re held to maturity; otherwise, long-term bonds risk losing value if interest rates rise.
Which is, of course, exactly what happened in 2022, when the Federal Reserve began to aggressively raise interest rates in an effort to rein in rampant inflation. Those rate increases hurt the value of government bonds, including those held by SVB.
SVB had no need for the cash. But the tech sector as a whole also took a downward turn in recent months, and companies increasingly began to withdraw their deposits from the bank.
In order to make good on those withdrawals, SVB had to sell part of its bond holdings at a steep loss of $1.8 billion, the bank said last week.
On Thursday alone, clients raced to collectively withdraw an attempted $42 billion in deposits, and SVB’s share value dropped by more than 60%. By midday Friday, SVB had been taken over by the FDIC.
Earlier last week, Silvergate, a California-based bank that caters to the cryptocurrency industry, announced plans to unwind its operations.
And on Sunday, regulators took over Signature Bank, a New York-based institution that expanded into the crypto industry in 2018 and saw $10 billion in withdrawals on Friday after SVB’s troubles began. Crypto has been hit hard since last year.
Long-term, analysts say the broader banking sector is still likely to be healthy.
