Silicon Valley Bank: A Bank Failure that Prompted Rapid Intervention by Government Regulators
On Friday 10 March 2023 and on the day before, long queues of anxious depositors formed outside branches of the Silicon Valley Bank (SVB), in the latest run on a bank in America. The ensuing collapse, within hours, of the 16th largest bank in the US, under the pressure of a rush of withdrawal demands amounting to $42 billion, further hastened by alarming reports on social media, represents the largest American bank failure since the demise of Washington Mutual, America’s then-largest savings and loan association, in 2008. SVB, which has seventeen branches in California and Massachusetts, was closed down by the California Department of Financial Protection and Innovation. The Federal Deposit Insurance Corporation (FDIC) was appointed receiver, setting up the Deposit Insurance National Bank of Santa Clara to maintain the SVB’s insured deposits.
Before the weekend was over, US government regulators had deftly moved in to support depositors and tech sector players, and to prevent spread of contagion to other financial institutions, thereby hoping to restore confidence in the American banking system. Secretary of the Treasury Janet Yellen, Federal Reserve Board Chair Jerome Powell, and FDIC Chair Martin Gruenberg issued a joint statement on the evening of 12 March, promising to “fully protect” all depositors’ money, but not at the taxpayer’s expense. Uninsured depositors were protected against losses, and were enabled to withdraw their money through a bridge bank set up for the purpose. This was important, as most (over 90 per cent) of SVB deposits were held in business accounts, with balances significantly greater than the FDIC-insured limit of $250,000. Shareholders (investors) and some unsecured debt-holders were left to face the consequences of bank failure.
Silicon Valley Bank was founded in 1983 by Roger V. Smith (first CEO, 1983-92), Robert W. (Bob) Medearis, and William E. (Bill) Biggerstaff, as a commercial bank to support the growth of “early stage venture backed companies” and was appropriately headquartered in Santa Clara, California. The story of their partnership is featured in the Computer History Museum in Mountain View, California. The bank specialised in providing a banking and financial partnership to venture capital-backed innovative startup tech companies, including software development companies and life sciences firms, and even extending to wine producers. The bank helped fuel the rapidly expanding entrepreneurial economy of the Silicon Valley and was considered an indispensable component of the tech sector ecosystem. It operated as a subsidiary of the SVB Financial Group- its parent company.
Depositors’ money was partly invested by SVB in safer, long-dated, and low-yielding US Treasury bonds, up to a total of $128 billion by the end of 2022. The Federal Reserve’s recent increase in interest rates to combat inflation had the unfortunate side-effect of lowering the value of these government bonds, which had to be sold at a loss to pay for recent withdrawals by tech depositors who were facing sector-specific cash flow problems. To counter losses of around $1.8 billion from the sale of its assets to meet these unforeseen demands for money, SVB had hoped to raise $2.25 billion with a new share offering to restore liquidity. In an interesting aside from Republicans and other right-wing elements, the failed bank’s demise was blamed on its “wokeness’ and “far-left” allegiances-reflected in its DEI (diversity, equity, and inclusion) targets and its ESG (Environmental, Social and Governance) policies-in addition to a perceived lack of focus on risk assessment and management. The SVB Financial Group’s Chief Executive Officer (Greg Becker) and Chief Financial Officer (Daniel Beck) were soon named in a class-action lawsuit over their role in, and suppression of facts leading up to, the collapse of the bank, filed by shareholders on 13 March in the federal courthouse of the US District Court for the Northern District of California in San Jose.
The much-smaller UK subsidiary was forced into insolvency by the Bank of England on 10 March. The assets (deposits) and liabilities (loans) of SVB UK Limited were acquired by HSBC UK Bank plc for the token amount of £1, following initial expressions of interest from the Bank of London, Royal Group (an investment firm in Abu Dhabi), and OakNorth ( a UK-based small- business lender). It was confirmed that “all depositors’ money with SVBUK is safe and secure” and that “SVBUK’s business will continue to be operated normally. On 12 March, SVB’s Canadian Branch was temporarily taken over by Canada’s Office of the Superintendent of Financial Institutions.
A smaller specialist bank, Signature Bank of New York, soon followed the path taken by SVB and was taken over by the New York State Department of Financial Services. This bank, the third-largest American bank to fail, was established in 2001 and provided banking services for law firms and the crypto industry. It became the first FDIC-insured bank to introduce a blockchain-based digital payment system in 2019. Similar to the outcome at SVB, all depositors’ accounts were protected by the regulator.
The collapse of SVB, followed by that of Signature Bank, are further examples of the possible effects of creeping deregulation of financial institutions. Under the prevailing system of fractional reserve banking, already loosened capital and liquidity requirements were further relaxed by the Economic Growth, Regulatory Relief and Consumer Protection Act, signed into law by President Trump in May 2018. Smaller, often regional, banks felt more empowered take risks with depositors’ money. To conclude, SVB is just another bank that happened to collapse under hubris, not in short supply within the banking community, while inadequately insulated against the financial shock from the impact of rising interest rates on an overindulgence in Treasury bonds.
Ashis Banerjee