SVB’s holdings are now managed by the Federal Deposit Insurance Corporation (FDIC) after a run on deposits
US bank regulators shut down Silicon Valley Bank (SVB) on Friday, March 10, after depositors scrambled to withdraw their money following doubts over the bank’s solvency.
SVB was the 16th largest bank in the US and the largest bank by deposits in Silicon Valley. It was known for serving startups, tech companies and venture-backed firms. The stunning 48-hour collapse is the largest bank failure since the closure of Washington Mutual in 2008, following the financial crisis.
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The FDIC announced on Friday that SVB customers who had up to $250,000 per account will have access to their funds by Monday morning. While 85% of SVB deposits were not insured (the FDIC typically protects everyday customers rather than businesses), the Biden administration assured that all depositors – insured or not – will be able to access their funds at no cost to the tax payer.
Good to know
The FDIC (Federal Deposit Insurance Corporation) is an independent U.S. government agency that provides insurance coverage for deposits at banks and savings associations in the United States. It was created in 1933 in response to the widespread bank failures of the Great Depression.
He said: “Thanks to the quick action my administration [has taken] over the past few days, Americans can have confidence that the banking system is safe. Your deposits will be there when you need them,” adding “no losses will be borne by the taxpayers.”
Deposits will be covered instead by the fees that banks pay into the Deposit Insurance Fund.
A statement released by the Federal Reserve on March 12 outlined that depositors will have access to all of their money starting Monday, March 13, but shareholders and certain unsecured debt holders will not be protected. Regarding investors, Biden simply stated “that’s just how capitalism works”, adding that they knowingly took a risk.
How did it happen?
SVB’s troubles date back to the pandemic, when interest rates were near zero. During this period, the bank invested most of its deposits in Treasury bonds and other long-term assets, and it experienced a period of strong growth. While this seems like a sensible decision (particularly given these assets are generally low-risk, low-return), interest hikes over the past two years knocked the value of the bonds, leaving the bank with huge losses.
SVB key customer base is tech firms that have been hit particularly hard over the past year.
Last week, SVB’s portfolio was yielding an average 1.79%, a figure far below the 10-year Treasury yield of around 3.9%.
Here’s a brief overview of how the events unfolded.
March 8: Silicon Valley Bank revealed a $1.8 billion loss on its bond portfolio resulting from interest hikes. They announced a share sale with the aim of raising $2.25 billion to plug the hole from losses suffered on previous investments. A classic bank run began as venture capital firms advised companies to withdraw funds from SVB.
March 9: The stock price of Silicon Valley Bank’s holding company, SVB Financial Group, fell by 60% at market opening, having a ripple effect on other banks (four biggest US banks also lost $52 billion in market value). Attempted customer withdrawals surged to $42 billion.
March 10: SVB Financial Group trading was halted. The Federal Reserve and the FDIC issued an order taking possession of SVB, citing inadequate liquidity and insolvency. The FDIC then established the Deposit Insurance National Bank of Santa Clara to re-open the bank’s branches by Monday and enable access to insured deposits.
March 12: The FDIC announce emergency measures, allowing both insured and uninsured customers to recover all funds.