Fed Admits Blame for Silicon Valley Bank Failure

Updated April 28, 2023

• The Federal Reserve acknowledged its role in the collapse of Silicon Valley Bank. In a 114-page report, the Fed noted how its supervisors were slow to recognize the extent of the bank's problems, and their failure to address the issues contributed to the bank's downfall. 
• The report said changes to bank regulation in 2019, which exempted all but the largest banks from strict scrutiny, also impacted its failure. 
• Following the collapse, the Fed promised more vigorous oversight of banks, including strengthening its supervision and regulation practices. 

Updated March 17, 2023

• Silicon Valley Bank's parent company filed for bankruptcy protection on Friday, specifically chapter 11 protection, commonly referred to as "reorganization" bankruptcy. 
• While assets sold through bankruptcy typically go to creditors, investors in SVB Financial — which hold around $2.2. billion in cash and liquid securities, $3.3 billion of bond debt, and $3.7 billion of preferred stock — may need help to cover losses at the bank. 
• Tension remains high as the bank failures stir economic fears. Yesterday, Treasury Secretary Janet Yellen spoke before Congress to assure the nation of the banking system's security. Yellen said: 

"I can reassure the members of the committee that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them. This week's actions demonstrate our resolute commitment to ensure that depositors' savings remain safe."

Updated March 15, 2023

• After the collapse of SVB, investors are growing worried about the stability of the global economy and banking system. While the U.S. took emergency measures to secure SVB and Signature Bank, stocks continue to tumble, sparking fear that the failure will have worldwide consequences. 
• The Dow Jones Industrial Average, which tracks the stock prices of 30 of the biggest American companies, dropped more than 1.7% on Wednesday morning, and the S&P, which tracks 500 large publicly traded stocks, fell 1.5%.
• This downfall on Wall Street was in part caused by a steep drop in shares of Credit Suisse, the second-largest bank in Switzerland and an important player in the global economy. Credit Suisse is a global investment bank and lender, meaning its failure would have global consequences.
• The decline of Credit Suisse's share prices led to a sharp decrease in rival banks and the European markets. The bank's chairman Axel Lehmann said its balance sheet is strong and they have sufficient capital, but investors are not assured. 
• In the U.S., large banks like J.P. Morgan Chase and Goldman Sachs are down more than 4.5%, and smaller regional banks are seeing sharp falls in stock prices.

What’s the story?

• Silicon Valley Bank (SVB) quickly collapsed late last week, marking one of the most significant and impactful banking failures since the 2008 financial crisis. 
• SVB, one of America's largest banks, provided services to nearly half of the nation’s venture capital-backed technology and healthcare companies and was a top lender to the start-up community. 
• The bank is now under the control of the U.S. Federal Deposit Insurance Corporation (FDIC) — an independent government agency that insures banks and financial institutions — after being unable to pay back customers who withdrew their deposits. 
• The collapse has sent a shock wave through Big Tech, Wall Street, and Washington D.C. U.S. and international authorities are working to prevent a full-fledged financial crisis. 

How did it happen? 

• The collapse occurred because the bank received large deposits from start-ups and used the money to buy billions of long-term U.S. government bonds. While the investments promised steady returns when interest rates were low, the Federal Reserve significantly increased interest rates to combat inflation, which the bank did not prepare for. 
• At the same time, start-ups had to put more money towards repaying debt as borrowing costs increased, meaning deposits were dwindling at SVB. As clients made large withdrawals, the bank was forced to sell its investments at a discount. Once the bank’s large depositors began making withdrawals — many of which were uninsured — SVB had to announce its losses, leading to even more companies taking out their money. 
• By Thursday, the bank’s stock fell 60%, dragging other bank shares down with it. Once the FDIC announced it would take over the institution, it put around $175 billion in customer deposits under the federal government's control. 

The aftermath 

• There is now concern about customers not trusting the American banking institution. Shares across the sector dropped over the weekend, with some midsized lenders using more than half of the value. Smaller banks like Signature Bank and First Republic are hustling to reassure customers and shareholders of their stable footing.
• Government regulators are racing to contain the aftermath as well. Treasury Secretary Janet L. Yellen told the public that the American banking system was “safe and well capitalized.”
• On Sunday, federal officials said in a statement: 

"Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles in protecting deposits and providing access to credit households and businesses in a manner that promotes strong and sustainable economic growth." 

• While the FDIC only insures up to $250,000 per depositor per insured bank, U.S. officials guaranteed that all SVB customers would get their money back. At the end of 2022, the bank reported holding $151.5 billion in uninsured deposits. According to regulators, the U.S. will tap into a deep reserve of bank-funded federal insurance money to pay back all customers. 
• President Biden spoke at the White House on Monday, assuring the public that his administration is taking action to contain the aftermath and that those responsible will be held accountable. 

“Americans can rest assured that our banking system is safe. Your deposits are safe. Let me also assure you that we will not stop at this. We will do whatever is needed on top of all of this.”

Should the FDIC insure more than $250,000 per depositor per insured bank?

-Jamie Epstein

(Photo credit: iStock/Sundry Photography)