Silicon Valley Bank (SVB), a caterer to innovative tech companies, collapsed on Mar 10, marking the second-biggest bank failure in US history. The bank faced 43 billion USD of deposit withdrawal requests, and it did not manage to raise cash to cover the outflow. As a result, the Federal Deposit Insurance Corporation (FDIC) took control of the bank via a new entity named the Deposit Insurance National Bank of Santa Clara.
SVB is the 16th largest bank in the US, with some 209 billion USD in assets as of Dec 31, according to the Federal Reserve. It is by far the biggest bank to fail since the financial crisis in 2008. What is more shocking is that the financial authorities took over the bank less than two days after SVB was reported to be suffering from financial difficulties. How did this leader in the financial services sector collapse and how will it impact the global financial market?
SVB serves the ecosystem of tech startups and the investors that fund them. For the past few years, the tech industry has been thriving, driven by the ultra-low interest rates, and the bank has also grown significantly. Along with the low interest rates and the active government support during the COVID-19 pandemic, SVB’s deposits boomed: it rose 86% in 2021 to 189 billion USD and peaked at 198 billion USD at the end of 2021, a striking rise from its standing at around 60 billion USD at the end of the first quarter of 2020.
The bank poured large amounts of deposits into what are often called “safe” assets, such as US Treasuries and government-backed mortgage bonds. 75% of the SVB’s debt portfolio was in those “safe” assets. The SVB should have decreased the proportion of the US Treasuries lest the interest rates soar: when interest rates started to rise quickly last year, the fixed interest rates of the “safe” assets could not keep up. The assets that the SVB owned were not worth as much as the bank paid for them. Moreover, startup companies required additional funds when the tech market froze due to the aggressive increase of interest rates, leading to a decrease in SVB’s deposits from 189 billion USD at the end of 2021 to 173 billion USD at the end of 2022.
The US depositor protection limit of 250,000 USD was ineffective in this case, as there were many companies that had deposits in SVB — the limit was not high enough for corporations. In practice, approximately 95% of the deposits in SVB were not subject to the depositor protection system. Therefore, tech companies continued to withdraw deposits from the bank. On March 9, the deposit withdrawal request of a single day topped 42 billion USD, and SVB’s attempt of balancing the asset decline by raising 2.5 billion USD worth of funds failed. As a result of this bank run, the FDIC stepped in and closed the bank on March 10.
The biggest closure of a bank since the global financial crisis is significant, both in terms of regulations and financial confidence. The collapse of the SVB signifies that the regulatory measures that the US government implemented to make banks safer and stronger after the global financial crisis, the depositor protection limit for instance, are inadequate. Although SVB is not a mainstream bank, with startups and tech companies making up the majority of their clients, its closure is still influential enough to alert financial authorities that the price of the government bonds banks bought during the pandemic is falling, and that a bank run can occur once more. The impact of the collapse of SVB on the financial market is significant as it sets back the US’s technological progress by up to a decade: the temporary hold of their funds has been proven to be detrimental to the tech companies which rely heavily on the investment rather than the cash flow.
US financial stocks have also crashed shortly after the SVB crisis, suggesting that the fall of an individual bank can also damage public trust in the entire financial sector. The closure of the SVB shows what could happen when one of the biggest assets of a bank — trust — collapses. It also implies that bank runs should be considered as a potential danger that can occur. It is time to check whether banks have built a protection system that is secure enough to not collapse in such a crisis.