In a matter of days, the United States saw its second and third largest bank failures ever.
Let’s start with Silicon Valley Bank, the 16th largest in the country with various offices nationwide. It was closed by regulators Friday and put under the Federal Deposit Insurance Corporation’s control (a buyer was found on Monday: HSBC, Europe’s biggest bank). Its collapse warranted the federal government getting involved more directly, assuring depositors access to their money. The reason for this extraordinary type of failure, not seen since the Great Recession, cannot be traced to one source. The banks’ recent actions, with a planned capital raise that failed and certain venture capitalists adding fuel to the fire by telling founders to pull money from it, were factors.
However, we can pull back the curtain farther. SVB saw profits soar over the last couple of years, driven by venture capital funding. Their deposit balances ballooned, tripling to just shy of $200 billion. SVB then put these extra funds in various securities; a majority of the cash went towards what are called “held-to-maturity” assets, which are held long term and are stable. A good portion went to “available for sale” assets; AFS are, as the name suggests, readily sellable, but they experience tremendous volatility and require intense portfolio management.
SVS had around $27 billion in AFS and $99 billion in HTM. The problem came into focus when taking a look at the balance sheet. Because so much of SVB’s HTM was tied to assets like Treasuries and mortgage bonds, their value, relative to the market, cratered due to interest rates (rates were at record-lows when they invested). But since these were being held until maturity, these losses don’t actually show up on the balance sheet. Instead, the potential for huge loss was there if they touched them.
Cue a period of extended withdrawal from SVB’s customer base, which is highly concentrated . Due to its niche as a startup hub, it had fewer than 38,000 customers who had relatively similar holdings and all knew each other. When one person wants their money back, more will want the same, and a feedback loop ensues. Now SVB has to sell assets to pay them back, but they can’t sell their HTMs since that would wipe them out. They therefore went to selling over $21 billion dollars worth of their AFS, and incurring almost $2 billion in losses. When a call for investors to raise money to cover that failed, the maneuver sealed the bank’s fate. In the end, a classic bank run combined with poor investment strategy and balance sheet mismanagement did SVB in.
The aftershocks are not nearly finished. The third largest bank failure happened right here in New York with Signature Bank just days after. Signature was a big crypto bank, and it failed to adapt to not only the effect of interest rates on securities, but also to recent shocks to the crypto system (like FTX’s collapse). Because SVB’s failure erased over $100 billion in market value from American banks, the jittery effect has worried many that more banks will fail. So far though, the FDIC and Joe Biden as well, seem to be assuring customers deftly that their money will be protected, even if over the $250,000 limit. Even so, the Monday morning market opening was one of the most tense in recent memory.
“Americans can have confidence that the banking system is safe,” President Biden said from the Roosevelt Room, speaking about the bank failures. “Your deposits will be there when you need them.”
