The SVB Bank Failure: A Warning for Other Banks
Silicon Valley Bank (SVB), founded in 1983 and the largest US bank to fail since the Great Recession, fell into insolvency in March of 2023 after a bank run, caused by a capital crisis that began when the bank’s parent company announced it would sell $2.25 billion in new shares to shore up its balance sheet.[0] At the time of its collapse, the 40-year old bank had $175 billion in deposits and roughly $74 billion in loans, most of which were to tech and startup companies.[1]
The bank’s unique specialization of providing banking services to tech startups may have been a factor in its downfall. SVB served almost half of all venture-backed technology and health care companies, and the majority of these companies held in excess of the FDIC-protected $250,000. Furthermore, the bank was heavily invested in long-dated bonds, which became less valuable as the Federal Reserve raised interest rates.[2]
The FDIC stepped in to offer insurance coverage up to a certain limit per depositor, per bank, for each account ownership category.[3] The FDIC also acted as the “receiver” of the failed bank, selling and collecting the assets of the failed bank and settling its debts, including claims for deposits in excess of the insured limit.[3] The American government also announced the close of New York-based Signature Bank and a $25-billion backstop for the failing banks to pay their depositors.[4]
It is important to note that large banks in general are better-positioned, including to take some market share from those smaller banks. Big banks are in far better financial shape than small ones, as they are less at risk of liquidity draining from them than small banks. Consequently, most major banks are in a satisfactory condition.[5]
The SVB failure serves as a warning for other banks, especially ones focused on serving large depositors above the FDIC limit (and thus highly exposed to a bank run).[5] To protect against this kind of fallout, it is essential to diversify investments and to maintain adequate risk management practices. Additionally, banks can offer cash management solutions that provide FDIC insurance above the $250,000 limit.[5] It is important to know who your deposits are with and what is insured.[3]
0. “What is Silicon Valley Bank? The bank’s collapse, explained.” Vox.com, 10 Mar. 2023, https://www.vox.com/technology/23634433/silicon-valley-bank-collapse-silvergate-first-republic-fdic
1. “The uncommon lending practices behind Silicon Valley Bank’s woes” CNBC, 16 Mar. 2023, https://www.cnbc.com/2023/03/16/the-uncommon-lending-practices-behind-silicon-valley-banks-woes.html
2. “Silicon Valley Bank was not your bank.” Slate, 15 Mar. 2023, https://slate.com/business/2023/03/silicon-valley-bank-insurance-deposits-small-banks.html
3. “Bank failures aren’t as uncommon as you think. Here’s what happens when a bank fails and how to know if your money is safe” Fortune, 13 Mar. 2023, https://fortune.com/recommends/banking/what-happens-when-a-bank-fails
4. “How Do Bank Rescues In India Fare Versus The U.S.?” BQ Prime, 14 Mar. 2023, https://www.bqprime.com/opinion/how-do-bank-rescues-in-india-fare-versus-the-us
5. “March 2023 Newsletter: A Look at Bank Solvency” Lyn Alden, 13 Mar. 2023, https://www.lynalden.com/march-2023-newsletter/
