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The Silicon Valley bank, which had served many of the world’s most powerful technology investors, collapsed on Friday and was taken over by federal regulators. The largest US bank to fail since the 2008 global financial crisis.
Then, on Sunday, regulators grew increasingly concerned about the financial health of New York-based Signature Bank, due in large part to its significant exposure to the volatile crypto market.
Now, both banks are controlled by the Federal Deposit Insurance Corporation, or FDIC.
Regulators announced the acquisitions after what was effectively a Silicon Valley bank run late last week when depositors scrambled to withdraw tens of billions of dollars in deposits.
The crash sent shock waves throughout the financial industry. Shares of small regional lenders have been hit; The bond market has swung wildly. And now, the Federal Reserve is being pressured to undo interest rate increases even as inflation persists.
There is a lot to keep track of. Here’s what you should know.
What was the Silicon Valley bank?
Although it was not a huge bank like Goldman Sachs or JPMorgan Chase, Silicon Valley Bank has punched above its weight during its 40-year history.
Based in Santa Clara, California, SVB’s clients have included venture capital firms, startups, and wealthy tech workers. It has become a major player in the technology sector, successfully competing with big-name banks.
“They’ve really developed a profile that was the envy of the banking industry,” said Jared Shaw, senior analyst at Wells Fargo. “They are able to provide all the products and services that any of these cutting-edge technology companies could need, as well as cutting-edge venture capital and private equity funds.”
Its clients have included technology companies and its neighboring companies such as Roku, Roblox, and Vox Media. (It turns out that this focus in the tech sector was key to its demise.) But he remained little known outside tech circles — until last week.
Why did the Silicon Valley bank collapse?
Silicon Valley’s bank business has boomed during the pandemic as tech companies boom. The bank’s clients filled its coffers with deposits totaling more than $100 billion.
In 2021, when interest rates were at record lows, the cash-rich SVB invested billions of dollars in long-term US Treasury bonds. These bonds, backed by the US government, are generally safe and modest investments. but they are paid in full only when they are due for maturity; Otherwise, long-term bonds risk losing their value if interest rates rise.
And that, of course, is exactly what happened in 2022, when the Federal Reserve began aggressively raising interest rates in an effort to rein in rampant inflation. These price increases hurt the value of government bonds, including those held by the SVB.
“The problem was that it wasn’t worth 100 cents on the dollar, because it was long-term interest rates. Interest rates went up. They had to sell it at a discount,” said Douglas Diamond, a professor of finance at the university. Chicago, in an interview with NPR. And that could have been avoided if the supervisors had said, ‘Look, we’re aware that interest rates could go up. “”
This was not a problem as long as the SVB did not need the money. But the technology sector as a whole has also taken a downward turn in recent months, and companies have increasingly started withdrawing their bank deposits.
In order to realize these withdrawals, SVB had to sell part of its bond holdings at a huge loss of $1.8 billion, the bank said last week. This announcement spooked the bank’s clients, who were concerned about the viability of the SVB, and then proceeded to siphon more money from the bank—a written definition of banking.
On Thursday alone, customers collectively raced to withdraw $42 billion in deposits, and SVB shares plunged more than 60% in value. By midday on Friday, the SVB had been taken over by the FDIC.
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What does this mean for other banks?
Other banks are not as precarious as SVB with its bond investments and exposure to the technology industry. However, the bank inflows raised concerns about the banking sector as a whole. Since last week, shares of all types of lenders, including major banks, have plummeted.
Other banks seen as potential participants in some of the same risks SVB shares saw their share values plunge Monday, including First Republic Bank which fell more than 60% and Western Alliance Bancorp which fell about 50%. Investors fear that other lenders, especially smaller and regional ones, will suffer a similar increase in withdrawals and struggle to meet redemptions.
Even traditional banks have taken a hit: JPMorgan has fallen more than 7% since last week, while Wells Fargo and Bank of America are both down more than 15%.
Earlier last week, Silvergate Bank, a California-based bank that caters to the cryptocurrency industry, announced plans to wind down its operations.
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 problems began. Cryptocurrencies have been hit hard since last year.
In the longer term, analysts say the broader banking sector is still likely to be healthy.
Banking analysts at Morgan Stanley said in a note late last week that SVB’s problems were “very specific and should not be read as a reading of other regional banks”.
“We want to be very clear here,” they wrote. “We do not believe there is a liquidity crisis facing the banking industry.”
Other banks have been hit by the panic selling, said Shaw, an analyst at Wells Fargo. “It’s really just a fear that has gripped the market, and it’s kind of self-perpetuating at this point,” he said.
What then happens to people who have relationships with SVB and Signature Bank?
Federal officials say all SVB clients will have full access to their deposits — even accounts with more than $250,000, the FDIC’s insurance limit. Accounts over this amount accounted for the vast majority of accounts in SVB. The move essentially included the $175 billion that was in customer deposits at SVB.
They said deposits in the signature bank would also be supported. Operations at both banks resumed on Monday, allowing account holders access to their funds.
This means that companies that have relied on SVB cash deposits for their day-to-day operations — to make payroll, for example — should be able to continue as normal.
Shareholders and some debtors will not be protected, says the FDIC. Top management has been removed from their jobs.
What will happen next to everyone else?
Federal officials are taking action to prevent the “contagion” from spreading to other banks. “The banking system is safe,” President Biden said in remarks Monday morning. “Your deposits will be there when you need them.”
The Federal Reserve has made funding available to other institutions to help bolster their cash reserves, a move that should help avoid a catastrophic meltdown at another bank.
However, the markets reacted strongly on Monday. The US stock market has been up and down throughout the day. Government bonds rose, sending their yields lower as investors sought safe investments.
The biggest impact was in the two-year Treasury yield, which generally reflects investors’ expectations about the direction of interest rates. That return has fallen by a full point, from just over 5% to just under 4%, since the middle of last week.
All of this is happening ahead of next week’s Federal Reserve meeting, at which the Fed will announce whether it will raise its benchmark interest rate again.
Rapid increases in the Fed’s interest rates over the past year have helped slow inflation. But the increases have also reduced the value of bond holdings, like the kind in which SVB invested billions and helped cause its collapse last week.
Before the SVB collapse last week, markets were expecting the Fed to raise interest rates by half a percentage point at its March meeting. Now, with the Federal Reserve under some pressure to moderate the increases, those expectations have fallen.
“Obviously, we don’t know the results of all the recent, very rapid increases other than what we’re starting to see in the banking sector. And I think the Fed has to step back and see the results of their handiwork before they can,” Barry Ritholtz, president of Ritholtz Wealth Management, said in an interview with NPR. It makes things worse.”
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