Contagion has an element of the cockroach theory: Where there are one or two cockroaches, there are likely to be more. It will be backed by $25 billion from the Treasury’s Exchange Stabilization Fund. Additionally, the leaderships at SVB and Signature were fired, and investigations have been initiated.Įqually important in the government’s response was that the Federal Reserve announced the establishment of a Bank Term Funding Program that will act as a source of liquidity for financial institutions to avoid fire sales a la SVB’s bond sale. The FDIC receives its income from premiums that banks and savings associations pay for deposit insurance coverage. He also stressed that no losses are to be borne by taxpayers. However, on March 13, President Joe Biden assured the nation that the banking system is safe, indicating that all deposits at the bank would be guaranteed, though no protection will be given to the banks’ investors. In the case of SVB, there was considerable apprehension that deposits over $250,000 would not be insured by the FDIC, as well as worries about knock-on effects on the local economy. Both of these banks were closely associated with the cryptocurrency sector.Ĭoncern over contagion in the banking sector prompted regulators and the government to act quickly. This concern was brought into sharper focus by the failure of two other banks, California-based Silvergate Financial Corporation (with assets of $11.4 billion at year-end 2022) and New York-based Signature Bank ($109 billion). While the large money center banks appear well capitalized, questions are now being raised over regional banks. Consequently, SVB’s failure is causing considerable anxiety. According to the FDIC, bank failures declined from a peak of 157 in 2010 to zero in both 20, while the total assets involved have radically declined. Tighter bank regulation since 2008, despite some loosening during the Trump administration, helped reduce the number of bank failures, and those that have occurred have been relatively small. Prior to 2023, Americans became accustomed to a low level of bank failures. ![]() It is the largest bank failure in more than a decade. Part of the shock is that SVB was the 16th largest bank in the United States, with assets of $212 billion as of Dec. ![]() What Has Made SVB’s Failure Such a Concern? As the bank increasingly came under pressure to meet short-term obligations, it conducted a fire sale of that portfolio, taking a $1.8 billion hit, which prompted regulatory action. The situation was made worse by the bank’s portfolio of long-term municipal and government agency bonds, which were hit by the Federal Reserve’s aggressive rate hikes. What appeared to have been a great business decision suddenly proved to be a major blunder.īy early 2023 SVB faced a major cash crunch. This quickly rippled through the crypto sector, raising questions about SVB’s exposure. SVB’s connection to the cryptocurrency sector worked well for the bank until the spectacular collapse of Sam Bankman-Fried’s crypto exchange FTX in November 2022. By the time of its failure in March, SVB was the largest bank in Silicon Valley, an important region for the Californian and U.S. All of these factors were mismanaged by a yield-hungry leadership. Positioning itself as an alternative to the large money center banks, SVB made itself the place to go for venture capital linked to Silicon Valley’s tech companies and as a safe harbor for cryptocurrency companies while maintaining an important role for local businesses, in particular vineyards and wineries. SVB’s failure was caused by the role the bank played in the cryptocurrency world, its heavy dependence on the tech sector, and rising interest rates. Silicon Valley Bank’s Failure: A Shattering Event in the Crypto Realm This was reinforced by the failure of two more banks in quick succession, Silvergate Financial Corporation and Signature Bank. In early 2023, however, the failure of Silicon Valley Bank (SVB) injected a queasiness into financial markets, raising questions about confidence in the banking sector. Although the shape and size of banks has changed, they maintain a central role of inspiring confidence and trust. There was a reason for this: Banks were meant to represent a safe place to put one’s money. Banks in centuries past were often formidable buildings, with large columns in the front and big, stout doors.
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