Silicon Valley Bank's collapse sows fear over banking system. Here's what to know.

Biden says banking system safe after two banks fail in a matter of days

The startling collapse of Silicon Valley Bank and Signature Bank continued to ripple across the American economy even as the U.S. raced to stabilize the banking system.

In a bid to contain the risk of contagion, financial regulators announced Sunday that they will guarantee all deposits at the banks, while President Biden said Monday that "Americans can have confidence that the banking system is safe." Here's the latest on the situation.

Feds take action after Silicon Valley Bank and Signature Bank fail

What happened to Silicon Valley Bank?

Silicon Valley Bank (SVB), the 16th-largest U.S. bank with $210 billion in assets, was seized by California regulators on Friday after depositors rushed to withdraw funds over concerns the bank might become insolvent. It is the second-biggest bank failure in U.S. history and the largest since the Federal Deposit Insurance Corporation was forced to take control of Washington Mutual in 2008 during the subprime housing crash.

SVB's collapse spooked customers at other banks, including clients with deposits exceeding the FDIC's $250,000 deposit insurance limit, and raised concerns about possible runs at other financial institutions. Heightening those fears, New York state regulators on Sunday shuttered Signature Bank — the third-biggest failure in U.S. banking history.

Another bank, Silvergate Capital, also blew up last week, although that preceded SVB's failure and stemmed from losses tied to the struggles of cryptocurrency customers like bankrupt FTX and Genesis. The government did not take control of Silvergate, which chose to liquidate. 

What is the government doing?

The FDIC, Federal Reserve and Department of the Treasury said in a joint statement on Sunday that the U.S. will guarantee the deposits of both SVB and Signature.

It's worth noting that the FDIC is required by law to resolve a failed bank while moving to protect depositors. The government said that SVB customers, most of which are small and midsize technology companies, will be able to tap their funds starting on Monday. 

The Fed and Treasury also launched a program that would advance capital for up to one year to any federally insured bank eligible to borrow from the central bank. The goal is to allow banks to cover deposit outflows without having to absorb losses on depreciated securities, according to Goldman Sachs analysts.

Are the feds bailing out banks — again?

The Biden administration quickly took the idea of a bailout for SVB off the table, no doubt sensitive to the optics of Washington again riding to the rescue of bankers, as the Obama administration did during the 2008 financial crisis. 

Mr. Biden and Treasury Secretary Janet Yellen said taxpayers won't be on the hook for any losses related to disposing of SVB, seeking to allay any concerns about Americans having to bear the brunt. Instead, the FDIC will handle the costs using the fees that banks contribute to the agency's deposit insurance fund.

Meanwhile, shareholders at SVB and Signature, along with their unsecured creditors, will lose their money and bank executives will lose their jobs. It is depositors who are being rescued. That is what bank regulators are supposed to do when lenders crash — protect Main Street.

Some Republican lawmakers, including House Financial Services Committee Chairman Patrick McHenry of North Carolina and Senate Banking Committee Ranking Member Tim Scott of South Carolina, were also careful to avoid framing the government's guarantees for SVB and Signature as a bailout. 

Still, some analysts think Republicans could look to make political hay out of the crisis, noting that the deep-blue states of California and New York were home to the two banks. 

Why did Silicon Valley Bank fail?

The short answer is that SVB, although profitable when California regulators took control, was unprepared for the Federal Reserve aggressively pushing up interest rates and the potential impact that would on its investment portfolio.

By industry standards, a disproportionate share of the company's capital was held in longer-duration investments, including mortgage securities and bonds, according to Bloomberg. As interest rates rose, the value of of SVB's investments fell, raising concerns about its solvency and leading the bank's customers to yank their funds. 

LPL Research said SVB appears to have held significantly more short-term marketable securities — or investments that can be sold quickly to raise cash — relative to its total assets or deposits than other banks its size. That suggests the bank was more vulnerable to sudden swings in the market and to pressure on bond prices, said the market research firm, which blamed SVB's downfall in part on what it called "balance sheet mismanagement."

Many of SVB's customers were venture capital-backed tech startups that grew quickly during the pandemic, with significant cash holdings they kept at SVB. As interest rates surged and the economy slowed, many of these players have burned through their cash, driving down the bank's deposits. That forced the bank to dump securities at a loss to raise capital to cover the outflow of deposits, which in turn threatened to wreck the company's balance sheet.

By contrast, experts say that most regional lenders, as well as the biggest banks, have far more diversified deposit bases.

What will happen to Silicon Valley Bank?

The FDIC scrambled to find a buyer for SVB after taking it over — that effort appears to have failed, although the agency could continue beating the bushes. Yellen told "Face the Nation" on Sunday that the FDIC was considering a "range of available options," including an acquisition by a foreign bank. 

Why did Signature Bank fail?

Regulators closed Signature, a $110 billion commercial bank with offices in California, Connecticut, Nevada, New York and North Carolina, on Sunday as customers alarmed by SVB withdrew their funds. 

On paper, Signature was on solid footing, and as recently as March 9 the company was touting its "strong financial position." But its collapse underlined how quickly panic can grip banking customers, who often move their assets to large banks when uncertainty flares. 

Barney Frank, the former House Speaker from Massachusetts and a member of Signature's board of directors, told the Wall Street Journal that the company failed because of an "SVB-generated panic."

Is the U.S. banking system safe?

Mr. Biden sought to reassure Americans that the nation's banking system remains stable, saying that "Your deposits will be there when you need them."

Bank industry analysts also expressed confidence that the banking system as a whole is safe. 

"We believe the events should not have significant broader implications for the economy and are not a sign of systemic risks to the banking sector," John Canavan, lead analyst at Oxford Economics, told investors in a report on Monday.

One reason that view might be right: The failures of Silicon Valley Bank, Signature and Silvergate appear chiefly a result of financial issues specific to each bank — exposure to interest rates at SVB and exposure to crypto industry losses at Signature and Silvergate — not systemic issues with America's banks.

In other words, these banks collapsed for markedly different reasons than those that slammed Lehman Brothers in 2008 as well as the broader lending industry during the ensuing crisis — issuing risky loans to millions of households and businesses across the country.

Also, because of SVB's relatively modest size — by comparison, JPMorgan Chase, the nation's largest bank, has more than $3 trillion in assets — the smaller bank was not subject to the Fed's regular stress tests. Bigger banks in the U.S. (along with smaller institutions in Europe and the U.K.) are subject to such reviews of their financial health, reducing the odds of a larger meltdown.

Still, more individual banks, especially small and regional lenders, could be at risk. Trading in shares of at least a dozen regional banks was halted Monday as jittery investors bailed from bank stocks.

San Francisco-based First Republic Bank, which has $212 billion in assets, lost more than 70% in early trade, while Western Alliance Bancorporation tumbled 81%, PacWest Bancorp plunged 50% and Zions Bancorporation sank 27%. Other well-known financial firms also took a hit, with the shares of Charles Schwab, Comerica and Fifth-Third Bancrop all dropping by double-digits.

"While the situation remains in flux, there are good reasons to think that [SVB's failure] does not call into question the solvency of the U.S. or wider global financial system in the way that Lehman did," analysts with Capital Economics said in a report. "But it illustrates the extent to which vulnerabilities are lurking in the financial sector and strengthens the case for central banks to exercise caution in raising rates further as the effects of policy tightening so far become apparent."

Is the crisis over?

Not yet, although most banking experts and market analysts think the immediate financial crisis will pass.

"For now, markets are not anticipating a Lehman Brothers-style panic, and based on existing information that is a reasonable response," Eric Vanraes, portfolio manager of the Strategic Bond Opportunities Fund at Eric Sturdza Investments, said in an email. "If we were in a Lehman-style environment, the Fed would have already cut rates."

The political reverberations, however, are likely to persist for some time to come. Expect lawmakers to summon banking regulators and industry executives to Congress to explain what happened and discuss how to guard against future bank runs. Yellen is likely to face questions about the situation when she appears before the Senate Finance Committee on Thursday to discuss the Biden administration's 2024 budget. 

One key question following the SVB debacle is whether bank customers across the U.S. with funds exceeding the FDIC's $250,000 deposit insurance limit can always expect the government to step in when lenders collapse. Although such backstops can help ensure confidence in the financial system, critics say it also creates "moral hazard." 

Under this scenario, if all deposits at big banks are guaranteed by the government, people and businesses are likely to park their money in whichever institutions offer the best interest rates — regardless of their financial condition. That could lead bank executives to take the kind of risks that required taxpayers to ride to the rescue in 2009.

President Biden hints at new banking regulation after Silicon Valley Bank collapse

Longer term, financial regulators are likely to face pressure to tighten their oversight of regional banks, especially of lenders like SVB with a large share of uninsured deposits. According to analysts at JPMorgan, uninsured deposit levels at the country's biggest banks average around 43%, but that figure can top 60% for some regional institutions — a risk when lenders wobble. 

That potential risk is considerable: Overall, roughly $7 trillion of deposits in U.S. banks is uninsured — 43% of total domestic deposits, the bank noted.

—The Associated Press contributed to this report.


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