What’s Going On?
Feeling A Little Peculiar: SVB Bank Edition
I’m sure by now you’ve heard about the Silicon Valley Bank collapsing. But what does this actually mean? We’ve put together some helpful sources you should check out regarding the collapse!
If the phrase “run on the bank” brings up fond memories of watching It’s a Wonderful Life at Christmas time, this PBS Newshour spot might be the best way to get a basic explanation of the situation for you!
So, what happened, exactly? If you are looking for a play-by-play, Investopedia has some really good information in this article, including a timeline of how the whole collapse process went down. Basically, Silicon Valley Bank was the 16th largest bank in the country, and although more than 550 banks have closed down since 2001, SVB is the biggest bank to fail since Washington Mutual during the financial crisis in 2008. This particular shutdown happened to fall at a really bad time- right when many US consumers are already fearing another recession.
On top of all that, it happened that most of the money in SVB customers’ accounts was uninsured. The Federal Deposit Insurance Corporation was created because of the Great Depression to protect consumers, and stabilize the American banking system. If your bank participates in FDIC insurance, your deposits are insured- up to $250,000 per account. (And if they don’t- please stop reading and change banks right now.) Because SVB catered to tech startups and other types of entrepreneurs in similar industries, many of their accounts held far more than the $250,000 that is insured by the FDIC.
As Vox recently reported, the FDIC has announced that it will “make available additional funding to eligible depository institutions” to reimburse depositors in full. However, this is all new ground, so no one really knows at the moment precisely how that will work, or when those who had money in SVB will be able to access their full deposits. Right now, according to Tech Target all of SVB’s deposits have been transferred to the Bank of Santa Clara. The FDIC is paying an advance dividend to all depositors, and is planning to issue certificates for the rest of the uninsured funds after selling off SVB’s assets.
So, why did it happen? There’s plenty of ideas, ranging from a lack of diversity in their investments, to red-flags and mismanagement at SVB itself, to the Trump administration’s rollback of some of the Dodd-Frank regulations which were set up after the Great Recession to prevent this exact thing from happening. (President Biden has said he wants those rollbacks reversed.) Warnings about SVB’s issues had been voiced all the way back in November 2022 by independent journalists, an FDIC chair, and with short sellers who started to bet against the bank’s stock. And as Pro-Publica points out, this is another bank bail-out: “Some depositors were facing losses and the federal government, backed by the public, prevented that — at as-yet-unknown scale and cost.” Although Investopedia points out that the cost should be covered by the fees banks pay to the FDIC for their insurance, there’s nothing stopping banks from raising fees on their customers if they wind up needing to pay more for their deposit insurance in the wake of all this.
Likely there won’t be one single cause for the run on SVB, and there is little point in speculating what went wrong until all the evidence is put together. NPR put together these 5 take-aways from the March 28th congressional hearing on the collapse:
Silicon Valley Bank's management messed up.
Regulators issued warnings, but the problems were not fixed.
Modern bank runs can happen really fast.
Other banks will pay for the failure, but maybe not all banks.
Bank executives could pay.
They go into detail on each of them in their article from the same date.
In the end, if you don’t have more than $250,000 in your accounts, you don’t have much to worry about when a bank collapses. However, if you would like more information on the history of bank runs in the US, along with some tips on how to choose a bank where your money will be safe, sign up for our Newsletter - we’ll be covering all that in this month’s Deep Dive!