London CNN—
Silicon-Valley-Bank collapsedwith amazing speed on Friday. Investors are now keen to see if his demise might trigger onebroader banking crisis.
The US federal government hasenteredto guarantee customer deposits, but SVB's demise continuesreverberateaboveglobal financial markets. The government also closed Signature Bank, a regional bank on the brink of collapse, and guaranteed its deposits.
In a sign of how seriously officials are taking the SVB's failure, US President Joe Biden told Americans Monday that they "can rest assured that our banking system is secure," adding, "We will do everything beyond that." do what is necessary.”
Here's what you need to know about the biggest US bank failure since the global financial crisis.
A Brinks armored car stands in front of the closed Silicon Valley Bank headquarters on March 10, 2023 in Santa Clara, California, United States.
What is Silicon Valley Bank?
Founded in 1983, Silicon Valley Bank was America's 16th largest commercial bank shortly before the collapse. It provided banking services to almost half of all US venture-funded technology and life science companies.
It also has offices in Canada, China, Denmark, Germany, Ireland, Israel, Sweden and the United Kingdom.
The SVB benefited enormously from this the explosive growth of the technology sector in recent years, fueled by extremely low borrowing costs and a pandemic-driven boom in demand for digital services.
The bank's assets, which include loans, more than tripled from $71 billion at the end of 2019 to a peak of $220 billion at the end of March 2022, according to the financial statements. Deposits rose from $62 billion to $198 billion during that period as thousands of tech startups parked their money with lenders. The number of employees worldwide has more than doubled.
Why did it collapse?
The collapse of the SVB came suddenly after a hectic 48 hours in which customers withdrew deposits from lenders in a classic run on the bank.
But the root of its downfall goes back several years. How many other banks, the SVB put billions in US government bonds in times of interest rates close to zero.
What seemed like a safe bet quickly fell through as the Federal Reserve aggressively hiked interest rates to tame inflation.
When interest rates rise, bond prices fall, so the rate hike has undermined the value of SVB's bond portfolio. The portfolio averaged a return of 1.79% last week, well below the 10-year Treasury yield of about 3.9%, Reuters reported.
At the same time, the Fed's wanderlust drove up the cost of borrowing, which meant tech startups had to channel more cash to pay down debt. At the same time, they struggled to raise new venture capital funding.
This forced companies to draw on SVB deposits to fund their operations and growth.
What triggered the bank run?
While SVB's troubles stem from its previous investment decisions, the run on the bank was sparked on Wednesday when the lender announced it had sold a number of securities at a loss and received $2.25 billion in new shares would sell dollars to plug the hole in his bank finances.
This caused panic among customers, who withdrew their money in large numbers.
The bank's shares plunged 60% on Thursday, dragging other bank stocks lower as investors began to fear a repeat of the global financial crisis of a decade and a half ago.
Trading in SVB shares was halted on Friday morning and efforts to raise capital or find buyers were halted. California regulators intervened, closing the bank and placing it under the receivership of the Federal Deposit Insurance Corporation, which usually means liquidating the bank's assets to repay depositors and creditors.
What about depositors and investors?
US regulatorscalledSunday that they would guarantee the deposits of all SVB customers. The move aims to prevent further bank runs and help tech companies continue to pay employees and fund their operations.
However, the intervention does not amount to a 2008-style bailout, meaning investors in the company's stock and bonds are not protected.
"Let me be clear that during the financial crisis investors and owners of systemically important big banks were bailed out... and the reforms that have been put in place mean we will not do that again," Treasury Secretary Janet said Yellen told CBS in an interview Sunday.
"But we are concerned about depositors and focused on meeting their needs."
Will this trigger a banking crisis?
Other banks are already showing signs of stress. Trading in the First Republic Bank(FRC)and PacWest Bancorp(PACW)was temporarily halted on Monday after shares fell 65% and 52% respectively. Karl Schwab(BLACK)The stock was down 7% as of 11:30 a.m. ET Monday.
In Europe, the benchmark Stoxx Europe 600 Banks index, which tracks 42 major EU and UK banks, fell 5.6% in morning trade - the biggest drop since last March. Shares in embattled Swiss banking giant Credit Suisse fell 9%.
SVB is not the only financial institution whose investments in government bonds and other assets have fallen dramatically in value.
At the end of 2022, US banks were sitting on $620 billion in unrealized losses - assets that have fallen in price but have not yet been sold, according to the FDIC.
In a sign regulators were concerned about a wider financial mess, the Fed said on Sunday it would provide eligible financial institutions with additional funds to prevent the next SVB from collapsing.
Most analysts point out that US and European banks now have much stronger financial buffers than they did during the global financial crisis. They also point out that SVB was very heavily exposed to the technology sector, which was particularly hard hit by rising interest rates.
"While SVB is a major failure, [it] and other niche players like Signature are quite unique in the broader banking community," research analysts David Covey, Adrian Cighi and Jaimin Shah of M&G Investments commented in a blog post on Monday. "So unique, in our view, that it is unlikely to cause material problems for any of the large diversified banks in the US or Europe from a credit perspective."
Why did HSBC buy UK store for £1?
HSBC stepped in on Monday to buy SVB UK for £1 ($1.2), securing the deposits of thousands of British tech companies holding money with the lender.
Had no buyer been found, SVB UK would have gone bankrupt from the Bank of England, which would have guaranteed customers only up to £85,000 ($100,000) worth of deposits – or £170,000 ($200,000) for joint accounts.
The rescue of HSBC is "fantastic news" for the UK startup ecosystem, said Piotr Pisarz, the CEO of Uncapped, a fintech startup that makes loans to other startups. "I think we can all relax a bit today," he told CNN.
In a statement, Noel Quinn, CEO of HSBC, said the acquisition "strengthens our commercial banking business and improves our ability to serve innovative and fast-growing businesses, including in technology and life sciences, in the UK and internationally".
FAQs
What caused the Silicon Valley Bank to collapse? ›
While deposits came in, SVB invested in debt like U.S. Treasuries and mortgage-backed securities, but as the Federal Reserve began to increase interest rates to combat inflation, the value of SVB's investments fell.
When did Silicon Valley Bank collapse? ›One of the most prominent lenders in the world of technology start-ups collapsed on March 10, forcing the U.S. government to step in. A Rapid Fall: The collapse of Silicon Valley Bank, the biggest U.S. bank failure since the 2008 financial crisis, was caused by a run on the bank.
Is the government bailing out SVB? ›SVB and Signature aren't going to be revived, and their lenders and shareholders aren't getting any government money. The money for depositors will come from a fund that banks pay into, the Deposit Insurance Fund, and not from taxpayers.
What action caused the bank crisis? ›Deregulation in the financial industry was the primary cause of the 2008 financial crash. It allowed speculation on derivatives backed by cheap, wantonly-issued mortgages, available to even those with questionable creditworthiness.
What are two reasons banks collapsed during the Great Depression? ›During the Depression, the pressure on those backup providers of capital proved unsustainable; moreover, large numbers of American banks hadn't joined the Federal Reserve system and so weren't able to tap its reserves to avoid collapse.
What happened with Silicon Valley Bank and Signature Bank? ›After depositors rushed to withdraw funds from Silicon Valley Bank (SVB), on Friday, March 10, 2023, the US bank was closed by the California Department of Financial Protection and Innovation (DFPI), and the Federal Deposit Insurance Corporation (FDIC) was named receiver of the closed bank.
What 2 major banks failed in the fall of 2008? ›U.S. regulators closed the Silicon Valley Bank on Friday after it experienced a traditional bank run, where depositors rushed to withdraw their funds all at once. It is the second largest bank failure in U.S. history, behind only the 2008 failure of Washington Mutual.
Why is Silicon Valley Bank important? ›Before its sudden collapse, Silicon Valley Bank played a pivotal role in the high-tech industry by catering to a range of innovative startups, internet companies, software makers, biotech firms and even winemakers.
Is my money safe in Silicon Valley Bank? ›In short, if you have less than $250,000 in your account, then you almost certainly have nothing to worry about. That's because the US government insures the first $250,000 in eligible accounts.
What bank is affiliated with Silicon Valley Bank? ›...
Silicon Valley Bank.
| Headquarters in Santa Clara | |
|---|---|
| Website | svb.com |
| Footnotes / references | |
Is Biden bailing out banks? ›
Biden has underscored that the federal government isn't bailing the bank out, echoing the assurances of Treasury Secretary Janet Yellen; the president stressed that the U.S. banking system is safe amid the last few days of uncertainty.
What was the main cause of the financial crisis? ›The catalysts for the GFC were falling US house prices and a rising number of borrowers unable to repay their loans. House prices in the United States peaked around mid 2006, coinciding with a rapidly rising supply of newly built houses in some areas.
What will happen if banks collapse? ›In the event of a bank failure, the Federal Deposit Insurance Corporation (FDIC) steps in to offer insurance coverage up to a certain limit per depositor, per bank, for each account ownership category.
How was the banking crisis solved? ›From 1929-1933, thousands of banks in towns and cities across the nation failed and millions of Americans lost their life savings. The Glass-Steagall Banking Act stabilized the banks, reducing bank failures from over 4,000 in 1933 to 61 in 1934.
Is my money safe in the bank during a depression? ›Money deposited into bank accounts will be safe as long as your financial institution is federally insured. The FDIC and National Credit Union Administration (NCUA) oversee banks and credit unions respectively.
What happens to your money in the bank during a recession? ›Typically, the protection goes up to $250,000 per depositor and per account at a federally insured bank or savings association. This includes checking accounts, savings accounts, money market accounts and certificates of deposit (CDs) at traditional banks as well online-only banks.
What banks have gone out of business? ›| Failed banks | Date closed |
|---|---|
| Allied Bank, Mulberry, Ark. | 09/23/2016 |
| The Woodbury Banking Company, Woodbury, Ga. | 08/19/2016 |
| First CornerStone Bank, King of Prussia, Pa. | 05/06/2016 |
| Trust Company Bank, Memphis, Tenn. | 04/29/2016 |
Merger with Union Bank
On April 1, 1996, the bank merged with Union Bank to form Union Bank of California, becoming the third largest commercial bank in California. In 2008 it became a wholly owned subsidiary of the Japanese Mitsubishi UFJ Financial Group, and was renamed MUFG Union Bank.
Personal & Small Business
Investors Bank will transition to Citizens over the weekend of Feb. 17. Find the latest information at our Resource Center.
Signature Bank was shut down by New York authorities. A regulatory takeover of a New York-based bank was intended to send a message to U.S. banks to stay away from the cryptocurrency business, a former member of Congress who was on the bank's board says.
What is the largest bank failure in the US? ›
It is the second-largest bank failure in U.S. history, behind only the 2008 failure of Washington Mutual.
What does the Silicon bank failure mean? ›The rising interest rates caused the value of its bond investments to decline in value, which in turn generated losses when the bank had to liquidate investments to meet depositor withdrawal demands.
What is the biggest bank collapse in history? ›The receivership of Washington Mutual Bank by federal regulators on September 26, 2008, was the largest bank failure in U.S. history.
What businesses are affected by Silicon Valley Bank? ›The failed bank had said it provided services to nearly half of all venture-backed technology and life-science companies in the United States.
What is the safest bank to put your money in the world? ›- Savings accounts are a safe place to keep your money because all deposits made by consumers are guaranteed by the FDIC for bank accounts or the NCUA for credit union accounts.
- Deposit insurance for savings accounts covers $250,000 per depositor, per institution, and per account ownership category.
- JPMorgan Chase.
- U.S. Bank.
- PNC Bank.
- Citibank.
- Wells Fargo.
- Capital One.
- M&T Bank Corporation.
- AgriBank.
The Reserve Bank of India is the central bank of the country.
Is Boston Private Bank part of Silicon Valley Bank? ›Boston Private is now an SVB Company. Silicon Valley Bank.
What President terminated the National Bank? ›
President Andrew Jackson announces that the government will no longer use the Second Bank of the United States, the country's national bank, on September 10, 1833. He then used his executive power to remove all federal funds from the bank, in the final salvo of what is referred to as the “Bank War."
Can the government freeze your bank? ›Banks may freeze bank accounts if they suspect illegal activity such as money laundering, terrorist financing, or writing bad checks. Creditors can seek judgment against you which can lead a bank to freeze your account. The government can request an account freeze for any unpaid taxes or student loans.
Do banks keep their money in banks? ›Federal law sets requirements for the percentage of deposits a bank must keep on reserve, either at the local Federal Reserve Bank or in its own vault. Any money a bank has on hand after it meets its reserve requirement is its excess reserves. It's the excess reserves that create money.
What caused the collapse of the savings and loan industry in 1988? ›The roots of the S&L crisis lay in excessive lending, speculation, and risk-taking driven by the moral hazard created by deregulation and taxpayer bailout guarantees. Some S&Ls led to outright fraud among insiders and some of these S&Ls knew of—and allowed—such fraudulent transactions to happen.
What banks led to the collapse of the 2008 housing crisis? ›September 2008: The Fall of Lehman Brothers
Yet the collapse of the venerable Wall Street bank Lehman Brothers in September marked the largest bankruptcy in U.S. history,18 and for many became a symbol of the devastation caused by the global financial crisis.
The result was a financial panic that drove the economy into a steep recession.
What was the main reason for the debt crisis of the 1980s? ›The origins of the 1980s Debt Crisis can be traced back to the acute shocks to the international monetary system in the 1970s: the collapse of the Bretton Wood system; the major oil prices hikes; and the substantial liberalization of international finance.
What was the major economic factor that caused the savings and loan crisis? ›Federal deposit insurance, which was extended to S&Ls in 1934, was the root cause of the S&L crisis. Deposit insurance was actuarially unsound from its inception, primarily because all S&Ls were charged the same Insurance premium rate regardless of how safe or risky they were.
What caused the great financial crisis? ›The catalysts for the GFC were falling US house prices and a rising number of borrowers unable to repay their loans. House prices in the United States peaked around mid 2006, coinciding with a rapidly rising supply of newly built houses in some areas.
Who fixed the 2008 financial crisis? ›How Was the Financial Crisis of 2007–2008 Resolved? In September 2008, Congress approved the “Bailout Bill,” which provided $700 billion to add emergency liquidity to the markets.
What caused the housing market crash? ›
In 2008, the housing market bubble burst when subprime mortgages, a huge consumer debt load, and crashing home values converged. Homeowners began defaulting on the home loans.
Who made money in the 2008 housing crash? ›Michael Burry, head of Scion Asset Management, in Cupertino, Calif., September 2010. Michael Burry rose to fame after he predicted the 2008 U.S. housing crash and managed to net $100 million in personal profits, and another $700 million for his investors with a few lucrative, out-of-consensus bets.
Why did President Jackson want to destroy the Bank of the United States? ›Jackson, the epitome of the frontiersman, resented the bank's lack of funding for expansion into the unsettled Western territories. Jackson also objected to the bank's unusual political and economic power and to the lack of congressional oversight over its business dealings.
How did the Bank War affect the economy? ›The resulting high inflation, and Jackson policies favoring hard currency (gold or silver) led many investors to panic and many banks to close due to insufficient reserves, in a financial crisis known as the Panic of 1837.
What was one reason the banking system collapsed during the Great Depression? ›The Depression
Many of the small banks had lent large portions of their assets for stock market speculation and were virtually put out of business overnight when the market crashed. In all, 9,000 banks failed--taking with them $7 billion in depositors' assets.