FILE PHOTO: SVB (Silicon Valley Bank) logo and decreasing stock graph are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration

SVB’s Collapse and What It Means for You

Why Did Silicon Valley Bank Fail?

SVB, the 16th largest bank in the U.S. and heavily skewed toward serving companies and individuals from the technology industry, faced significant challenges amid a tough phase for tech firms and the Federal Reserve’s move to increase interest rates. The bank, like others, invested billions in safe investments, such as Treasuries and bonds, whose value began to plummet due to higher interest rates. Typically, banks aren’t required to report the loss in the value of bonds until they sell them. However, with the bank’s customers (primarily tech-focused startups) withdrawing deposits, it was forced to sell a substantial portion of its bonds, leading to huge losses. As news of the withdrawals spread, it worsened the situation, ultimately leading to the bank’s insolvency marking the second-largest bank failure in United States history and the largest since the 2008 financial crisis.

What Did the Government Do in Response?

In response to the recent bank collapses, the US government has taken steps to guarantee deposits in banks, including Silicon Valley Bank and Signature Bank, beyond the $250,000 insured deposit limit. This move is critical because many of Silicon Valley’s tech-focused clients had deposits beyond the limit, and as much as 90% of the bank’s deposits were uninsured. By guaranteeing all deposits, the government aims to prevent bank runs and to reassure businesses and individuals of the safety of their deposits. Additionally, the Federal Reserve has launched an emergency lending program to provide banks with the necessary funds to cover customer withdrawals without resorting to bond sales, which could threaten their financial stability. The program has no borrowing limit, but banks will need to provide collateral to borrow money. The primary aim of the program is to reassure the public that the government is committed to protecting their deposits and will lend whatever is needed to ensure their safety.

How is this Program Designed to Work?

In contrast to its convoluted efforts to rescue the banking system during the financial crisis of 2007-08, the Fed’s current strategy is much simpler. They have established a new lending program called the “Bank Term Funding Program,” which will provide loans to banks, credit unions, and other financial institutions for up to one year. The banks will be required to put up Treasuries and other government-backed bonds as collateral. The Fed is offering favorable terms, with a low-interest rate that is only 0.1 percentage points higher than market rates and lending based on the face value of the bonds rather than the market value. This provision will enable banks to borrow more funds as the value of the bonds has decreased on paper due to rising interest rates. According to the FDIC, US banks held securities with approximately $620 billion in unrealized losses at the end of last year. If they were compelled to sell these securities to cover a wave of withdrawals, they would suffer significant losses.

What Does This Mean for Consumers?

According to Mina Tadrus, CEO of investment management firm Tadrus Capital, the failure of banks like SVB and Signature can have negative impacts on both customers and investors. These include a decrease in overall account settings, liquidity issues when needing quick access to funds, and potential difficulty transferring funds to other banks depending on withdrawing or transfer limits. Additionally, hedge fund firms that use these banks for operations may experience losses that could spread into a wide array of businesses in the financial sector, causing instability within institutional banking systems. The effects of these failures extend beyond depositors, as seen with online marketplace Etsy and venture-backed retailer Camp, which both experienced delays and encouraged purchases to stay afloat. The collapses also caused anxiety among consumers and small business owners and halted trading in several bank stocks due to volatility. However, President Joe Biden sought to reassure Americans that their deposits are safe, and the Federal Reserve has implemented measures to prevent future collapses.

What Will This Cost Taxpayers?

Both insured and uninsured deposits at the two failed banks will have access, but taxpayers won’t bear any losses, as both the FDIC and President Biden mentioned on March 13. Instead, banks will pay for the funds through the Deposit Insurance Fund, which consists of premiums banks pay quarterly for deposit insurance coverage. According to Treasury Secretary Janet Yellen’s testimony ahead of the Senate Finance Committee hearing on March 16, the funds to cover deposits at the two banks will come from fees imposed on banks. Emergency actions were taken by the Fed and the Treasury on March 12 to ensure public confidence in the banking system, as maintaining access to deposits and credit for consumers and small businesses helps to foster strong and sustainable economic growth, the statement said.

So I Don’t Need to Panic?

No. It is reassuring to note that most investors need not worry as the current situation does not demand immediate action. At this time, most experts will advise that the best strategy is to do nothing. The equity market, particularly bank stocks, may be affected in the short term, but a repeat of the 2008 financial crisis is unlikely. Regulations put in place since then ensure that banks hold capital buffers to protect against systemic risks. However, it is vital to be aware of significant aspects related to the rapidly changing situation and how it could affect your financial plan.

As always, feel free to reach out to us if you have any questions or ideas regarding your financial objectives.

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