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Silicon Valley Bank experienced a run on deposits that culminated in the bank’s collapse on March 10. A bank run occurs when depositors no longer feel that their money is safe in a bank, so they demand their deposits back. Most banks, however, do not hold the full value of all deposits because they loan out money and make investments to turn a profit.
When a run happens and a bank cannot meet demand, federal regulators step in to freeze the bank’s operations and make the decision to either sell the now-collapsed bank’s deposits to a healthy bank or to pay out depositors.
The run on Silicon Valley Bank failed to meet customers’ demands for deposits – forcing regulators to step in. According to the New York Times, $175 million in customer deposits were put under the authority of regulators following the seizure. Ninety-three percent of Silicon Valley Bank deposits were uninsured by the FDIC as the federal insurance program only insures up to $250,000. Most Silicon Valley Bank customers were tech firms with far more than $250,000 deposited – raising concerns that were later addressed.
Silicon Valley Bank’s demise was the largest bank failure since the 2008 financial crisis and its potential domino effect sent investors, federal policymakers, and firms across the country into a scramble to shore up deposits and the banking system at large.
On March 12 another domino fell when New York-based Signature Bank was seized by regulators after experiencing a run of its own. Similarly to Silicon Valley Bank, depositors were spooked and lost confidence in the bank’s ability to responsibly hold their money.
To prevent further panic, the U.S. Treasury, Federal Reserve and FDIC made the joint announcement on March 12 that “Depositors [of Silicon Valley Bank] will have access to all of their money starting Monday, March 13.”
This announcement came with the promise that no losses “will be borne by the taxpayer” and that similar provisions will be made for Signature Bank depositors. These provisions, which the institutions are calling “systemic risk exceptions” ensure that all deposits – no matter if they are above $250,000 or not – will be returned in full to depositors.
In a speech on March 13, President Biden said, “Today, thanks to the quick action of my administration over the past few days, Americans can have confidence that the banking system is safe. Your deposits will be there when you need them.”
Issues, however, continued and that same day many banks saw losses in their stock values. First Republic Bank – a regional bank headquartered in San Francisco – saw its stock prices tumble by sixty percent while other medium-sized banks also saw losses.
Just three days later, on March 16, The Wall Street Journal reported that $30 billion in deposits came flooding into First Republic from eleven of the nation’s largest banks – including JP Morgan Chase, Wells Fargo, and Bank of America. According to The Wall Street Journal, this move was “an effort to stop a spreading panic” which regulators say highlights the soundness of the banking system. Secretary of the Treasury Janet Yellen said that the “support represents a vote of confidence in our banking system.” For now, First Republic has stayed afloat.
The issues in the United States have coincided with another internationally unfolding banking crisis epicentered in Switzerland. Credit Suisse – one of the largest banks in Switzerland – began to have issues of its own and depositors were worried. To prevent yet another bank run and collapse, Credit Suisse was bought out by Switzerland’s largest bank, UBS, on March 19.
To gain further insight on Silicon Valley Bank’s collapse, The Northern Light reached out to economics professor Paul Johnson. In an email, Johnson explained the collapse as follows:
“The problem seems to have been triggered by recent high-interest rates. SVB had invested in buying a lot of long-term, low-yield (low-interest rate) bonds.”
These low-yield bonds became an issue for the bank when the Federal Reserve began to raise interest rates as part of its inflation fighting policy. This action caused the bonds to be worth less than what Silicon Valley Bank had originally bought them for.
“... if SVB wanted to sell bonds on the market it would have to compensate potential buyers for the [low interest rate] with a lower price,” Johnson wrote.
Johnson further explained that, theoretically, “if all the SVB depositors showed up to withdraw their money there would be [none] there. SVB could sell all its bonds and other assets and still not return depositors all their money. SVB would be bankrupt.”
Currently, bank shares and general fears about the banking system have not fully stabilized. Even so, the Federal Reserve’s decision on March 22 to raise interest rates – in an attempt to continue its battle against inflation – cements the federal government’s stance that the banking system is secure. In a March 22 press conference, Chair of the Federal Reserve Jerome Powell reiterated this stance, saying that “the banking system is sound and it's resilient.”
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