Financial news outlets are buzzing following the recent collapse of Silicon Valley Bank and Signature Bank. Within less than two days of each other, the country’s 16th largest bank, Silicon Valley Bank, and crypto-lender, Signature Bank, hit rock bottom. The country had not seen a bank failure of this magnitude in over a decade, so what prompted these bank’s collapse and could it have been prevented entirely?
Here’s what we know about the Silicon Valley Bank and Signature Bank failures.
Silicon Valley Bank
SVB was the nation’s 16th largest bank and had over 40 years of lending experience, lending to major tech-startups and top venture firms. Though they had top-level companies, like Etsy, Roblox, and Roku, as clients, SVB raised concern with depositors when they issued a message to investors regarding their recent strategic actions. In order to strengthen their financial position, SVB repositioned their balance sheet to increase asset sensitivity and sold off all Available for Sales (AFS) securities portfolio in an effort to raise nearly $2 billion in capital.
Though SVB CEO, Greg Becker, attempted to reinforce the bank’s commitment to a strong financial future, the bank failure was imminent. Just two days later the bank collapsed following a run on deposits from clients concerned on the health of the bank.
Bank Failure Investigation and Receivership
On March 10, 2023, federal examiners and members of the FDIC began examining Silicon Valley Bank’s finances onsite. Only a few hours into their investigation, the California Department of Financial Protection and Innovation (DFPI) took possession of Silicon Valley Bank’s assets, prompting the FDIC to be appointed as receiver controlling nearly $175 billion in customer deposits.
Members of the Federal Reserve and FDIC held a meeting to discuss the downward spiral of SVB with members of Congress, sharing details into its year-long decline that had mostly accelerated within the last week. Industry leaders pointed out SVB failed to diversify both its investments and customer base. As interest rates climbed, the bank did little to hedge its liquidity and interest rate risk leaving SVB vulnerable. Executives even shared that they had suffered a near $2 billion loss on investments in an attempt to generate cash to satisfy deposit requests.
Less than one week following the investigation and receivership, SVB Financial Group, former parent company of Silicon Valley Bank, filed for bankruptcy.
Signature Bank
The fallout of SVB reverberated across the entire banking community. In response to the Silicon Valley Bank failure, investors began dumping bank stock leading to significant price dips within major financial institutions, including Signature Bank.
Treasury Secretary Janet Yellen attempted to reassure investors via a press release sharing, “…the banking system remains resilient and regulators have effective tools to address this type of event.” But tensions were not eased by Yellen’s remarks. Signature Bank customers withdrew more than $10 million in deposits within two days of the initial SVB investigation causing a run on deposits, just like SVB.
Signature Bank had over 27 US branches totaling assets in excess of $100 billion. And just like SVB, Signature Bank had deep ties to the tech industry but became known within the banking industry as a crypto-lender.
If you’re keeping track, Signature Bank was the third largest bank failure in US history and the second largest bank failure during the recent banking crisis.
Depositor Discourse
The bank failure of both Silicon Valley Bank and Signature Bank created rightful discourse for dispositors worried about their hard earned dollars and long-term investments. In a press release issued on March 10, 2023, the FDIC explained to the public that they had created the Deposit Insurance National Bank of Santa Clara (DINB) to protect SVB depositors. They assured depositors would have full access to FDIC covered deposits no later than March 13, 2023. And Tthe FDIC also alerted uninsured depositors of an advance dividend payment within a week’s time, issuing a receivership certificate for remaining uninsured funds.
However, in a press release the following Monday, the FDIC provided an update that all depositors would be made whole, regardless if the deposits were over the FDIC insured amount. Administration officials emphasized that the moves did not represent a bailout because stock and bondholders would not be protected. Rather the purpose of covering all depositors was to allow companies and small businesses to make payroll.
That same day, another FDIC press release was issued, this time regarding Signature Bank. The press release read, “Signature Bank was closed today by the New York State Department of Financial Services, which appointed the FDIC as receiver. To protect depositors, the FDIC transferred all the deposits and substantially all of the assets of Signature Bank to Signature Bank, N.A., a full-service bank that will be operated by the FDIC as it markets the institution to potential bidders.” Like Silicon Valley Bank, the press release went on to say that all depositors will be made whole and no losses will be incurred, though shareholders and uninsured debt would not be protected.
On March 19, 2023, it was announced that New York Community Bank had agreed to buy a significant portion of Signature Bank totaling $2.7 billion.
Financial Fallout
First Republic Bank
The banking crisis didn’t start and stop with SVB and Signature Bank. Less than a week later, First Republic Bank and Credit Suisse were on the brink of extinction before being bailed out by private investors.
The fallout from the banking crisis hit First Republic Bank hard, dropping shares to their lowest point ever. But instead of government intervention, FRB was rescued by the likes of 11 competing financial institutions, like JPMorgan and Citigroup, to the tune of $30 billion. While this move seems unselfish in nature, the true intention of the $30 billion deposit is to restore confidence in the US banking system and destroy further discourse.
Credit Suisse
In the memo on their website, Credit Suisse shared with customers (and interested parties) that as of Sunday, March 19, Credit Suisse has entered into a merger agreement with known competitor UBS following the intervention of the Swiss Federal Department of Finance.
But Credit Suisse’ financial woes weren’t as simple as that of SVB or Signature Bank. The Saudi-backed banking giant had been at the center of financial concerns for years following headline scandals, bad bets on hedge funds and a rotating cast of upper management. The emergency buyout was brokered by the Swiss Government for $3 billion – approximately 60% less than the bank was worth following market closing.
What’s next for the Credit Suisse and UBS merger? According to UBS Chairman Colm Kelleher, UBS plans to downsize Credit Suisse’s investment banking business and better align it with UBS’ conservative risk culture.
Lessons Learned
The collapse of Silicon Valley Bank and Signature Bank, the panic related to First Republic, and the collapse of Credit Suisse has prompted the Fed to shift gears quickly. There are other banks that have risks similar to Silicon Valley Bank due to purchases of long-term bonds before the Fed’s rapid rate hike. These bonds have gone down in value (prices of bonds fall when yields rise). The Fed, on March 12, unveiled the Bank Term Funding Program to help banks that have this type of interest rate risk.
Prior to the bank crisis, the Fed had also been prepared to announce a 50 bps rate hike at their regularly scheduled FOMC meeting. On Wednesday, the Fed instead announced a 25bps (i.e., a quarter of a percent) rate hike, bringing the target fed funds rate between 4.75 and 5.00%. The Fed admitted that they considered not raising rates at all. However, they decided that intermediate inflation data and the strong labor market still called for the need to raise rates.
For fiduciaries and households there is much to consider as rates rise and banks falter. If there is a lesson to be learned from the crisis, it’s that a lack of diversification can result in catastrophe. Silicon Valley Bank lacked diversification in its deposit base, focusing on venture capital and the tech industry. Signature Bank had over exposure to crypto-related companies.
With the increase in rates, cash can now be made productive in CDs and money market instruments. A little more than a year ago any interest generated would have been minimal. However, it’s important to continue to follow best practices of remaining within the $250,000 FDIC insurance deposit amount.
If cash assets are greater than $250,000, it’s important to diversify in different CDs across different banks while staying under the $250,000 limit. Even though the government has decided to make all depositors at Silicon Valley Bank and Signature Bank whole, there is no guarantee they will do this with other banks.
Going forward, we can expect that there will be increased financial regulation and tighter rules going forward in order to hopefully prevent these types of crises from happening again. If you have questions on the recent banking crisis or are interested in speaking with an investment advisor on how to diversify your investments, we invite you to connect with our team at any time.
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