What we can learn from the second-largest bank failure in the U.S. 2023

Silicon Valley Bank’s demise within 48 hours was the second-largest financial institution failure in U.S. history.

SVB, one of the 20 largest commercial banks in the United States, is currently under the supervision of the US Federal Deposit Insurance Corporation due to its inability to repay clients who withdrew their savings.

Despite experts’ efforts to allay worries of a larger contagion, the bank’s failure could have substantial effects on the startup and technology industries.

Below is what we currently know.

SVB was a colossal bank.

Silicon Valley Bank, founded in 1983, supplied funding for over half of US venture-backed technology and healthcare enterprises; however, increasing interest rates and declining venture capital have harmed them.

According to the FDIC, SVB ranked among the top 20 US commercial banks with $209 billion in total assets at the end of last year, despite being largely obscure outside of Silicon Valley.

It is the greatest bank failure in the United States since 2008 when Washington Mutual failed.

The FDIC moved remarkably swiftly.

On Wednesday, SVB disclosed that it had sold a number of instruments at a loss and will sell $2.25 billion worth of additional shares to shore up its balance sheet.

Friday, California officials shut down the technology lender. The FDIC is acting as a receiver, which generally entails that it will liquidate the bank’s assets in order to repay its clients, including depositors and creditors.

All insured depositors will have full access to their guaranteed savings no later than Monday morning, according to the FDIC, an independent federal body that guarantees bank deposits and supervises financial institutions. It stated that uninsured depositors will get a “advance dividend” within the next week.

Friday around mid-morning, the FDIC assumed control; normally, it waits until the markets close.

The CEO of Better Markets, Dennis M. Kelleher, wrote that SVB’s condition worsened so rapidly that it could not have lasted five more hours. Because depositors withdrew their funds so rapidly, the bank became insolvent, and an intraday closure was necessary as a result of a typical bank run.

High borrowing rates brought about its death.

Since 2022, the central bank has aggressively increased interest rates to battle excessive inflation. It increased the cost of borrowing for firms and individuals in order to slow the economy.

While interest rates were close to all-time lows, banks purchased long-dated, ostensibly low-risk Treasuries. But, as interest rates climbed, the value of these assets declined, leaving them with unrealized losses.

High interest rates severely limited technology businesses, which diminished the value of technology stocks and made it harder to raise capital.

Faced with these rising interest rates, the loss of IPOs and a funding shortage, SVB’s clients began withdrawing funds.

“The rising rates have also decreased the value of their government and other assets that SVB required to pay depositors,” said Mark Zandi, chief economist of Moody’s. All of this precipitated a run on their accounts, forcing the FDIC to assume control of SVB.

This is not yet a banking crisis.

Bill Ackman, a billionaire hedge fund manager, compared SVB on Thursday to Bear Stearns, the first lender to fail at the onset of the global financial crisis of 2007-2008.

Ackman remarked on Twitter: “The danger of failure and deposit losses is that the next, least well-capitalized bank suffers a run and fails, and the dominoes continue to fall.”

According to Julia Horowitz and Anna Cooban, the majority of experts believe that SVB’s implosion is company-specific for the time being.

Similar to SVB, banks, and lenders with specialized customers would bear the brunt of the impact.

Jonas Goltermann, the deputy chief markets economist at Capital Economics, explained, “SVB is in difficulties due to its exposure to certain industries.” He said that most other banks are more “diversified.”

There is also less concern about the soundness of the banking industry as a result of the considerable regulatory reforms implemented after the 2008 financial crisis.

In general, ordinary customers are unlikely to be harmed. But, the collapse serves as a warning to keep track of where your money is housed and to avoid putting it all in one location.

“The first bank collapse since 2020 is a wake-up message for individuals to always make sure their money is in an FDIC-insured bank, within FDIC limitations, and in accordance with FDIC guidelines,” Bankrate analyst Matthew Goldberg said.

IT businesses are in a panic.

Catherine Thorbecket noted that SVB was a leading lender to the startup community, whose entrepreneurs now worry about getting their money out, paying payroll, and meeting operating expenditures.

Ashley Turner, the creator of health food delivery firm FarmboxRx, told CNN in an e-mail, “Now that the bank has failed, I simply want to know what happens next.” “The FDIC protects $250,000, but will I recover all eight figures?”

Some are becoming imaginative. Friday, CAMP, a retailer of children’s toys, clothing, and experiences, emailed customers and promoted them on their website.

“Unfortunately, the majority of our company’s monetary assets were held in a bank that just failed. Certainly, you have heard the news.” It encouraged shoppers to use the discount code BANKRUN to save 40% on all items (or pay full price – which it said would be appreciated).

Some lenders are experiencing difficulties.

Comparable lenders to SVB are in a precarious position.

Silvergate, a lender specializing in cryptocurrencies, said that it is ceasing operations and would dissolve the bank as a result of being financially devastated by the upheaval in digital assets.

“In view of recent industry and regulatory developments, Silvergate feels an orderly wind-down of Bank activities and a voluntary liquidation of the Bank is the appropriate course of action,” the company said in a statement released on Wednesday.

For the time being, however, it is believed that the likelihood of a pandemic is minimal.

Professor of finance at King’s College London Jens Hagendorff remarked, “Generally, the financial system is in good health and can sustain severe shocks.” I believe SVB is unique in that they have a fickle depositor base.

Stocks dropped Friday.

On Friday, the Dow plummeted 345 points or 1.1%. The S&P 500 fell 1.5%, while the Nasdaq Composite fell 1.8%.

The Dow lost 4.4% for the week, its lowest performance since June. The S&P 500 fell 4.6%, while the Nasdaq fell 4.7%.

The Wall Street fear index, the VIX, rose 15% on Friday afternoon as investors flocked to safe havens to prevent banking sector contagion, according to the markets team.

You May Also Like

About the Author: Sanjh Vishwakarma

Leave a Reply