Silicon Valley Bank (SVB) and Signature Bank – The REAL Story
Are you watching a lot of Silicon Valley Bank news, and wondering what went wrong at SVB and Signature Bank? Why did the Silicon Valley Bank fail? What triggered SVB collapse?
Want to really understand the SVB bailout? Here’s SVB collapse explained in a super-simple way.
- Silicon Valley Bank: The Headlines
- The Context
- Huge Mistake
- Run on the Bank
- Accelerating the Collapse
- Signature Bank
- The Customers
- The Future
Silicon Valley Bank: The Headlines
With over $150 billion in deposits and $200 billion in assets, the collapse of Silicon Valley Bank was the 2nd largest bank failure in US history.
Only a few days later, Signature Bank – with over $100 billion in assets – also failed.
In a world where we have come to think of bank failures as a thing of the past, what made 2 massive banks fail back to back?
This shocking story is one you won’t want to miss.
So, let’s find out what really happened.
First, you need to understand that in addition to giving out loans, banks also invest some of their deposits. They generally diversify into multiple asset classes such as equities, fixed income, real estate, etc.
However, Silicon Valley Bank made a critical mistake that led to its collapse. Much like many individual investors, they did not diversify!
SVB Made A Huge Mistake
Instead, they invested disproportionately into US government bonds.
To their credit, these are usually a safe investment choice. However, as interest rates rose, the value of those bonds started to decrease, greatly reducing the value of their investments.
On its own, this wouldn’t have been a big deal. But what happened next cemented the fate of Silicon Valley Bank.
It all started with a totally different, crypto-centric bank Silvergate Bank shutting down due to the impact of the turmoil in the crypto world.
While that wasn’t unexpected, it prompted investors to look closely at banks servicing startups and crypto firms, as they feared they could lose their money.
Run on the Bank
Due to this, Silicon Valley Bank’s customers started withdrawing their money, forcing SVB to sell their bonds at a huge loss.
SVB announced that it had lost $1.8B in this process, and therefore urgently needed to raise capital to balance its portfolio.
This led to widespread panic and a run on the bank. Too many people tried to withdraw their money all at once.
To give you a perspective, during the largest bank failure in the US so far – Washington Mutual in 2008 – depositors withdrew $16.7 billion in eight days, whereas with SVB, $42B was withdrawn in a single day.
SVB did not have enough money to fund all the withdrawals even after selling the bonds – as their value had significantly reduced.
This is what led to the failure of Silicon Valley Bank.
Accelerating the Collapse
Ironically the very sector that SVB served – tech startups – fueled the run on the bank: panic created in social media by large venture capital firms asking clients to withdraw their money.
And the incredible ease of withdrawals using digital banking massively accelerated the collapse.
But what about Signature Bank, another huge bank that failed only a few days later? Its story is even more intriguing.
Signature bank started out as an old school bank and stayed that way until 2018, when it began servicing the crypto industry and received billions of dollars in deposits from them.
After the collapse of Silicon Valley Bank, the customers of Signature Bank, most of them with huge uninsured deposits, got spooked and began withdrawing their money from the bank, and ended up taking out $10 billion in just one day!
To contain the panic and prevent the bank from totally collapsing, regulators seized Signature Bank. This was a preventive measure by the government to ensure that the whole banking system doesn’t crumble.
So what happens to the customers of these banks who couldn’t withdraw their money in time?
Thankfully, the government has guaranteed that the customers of both Silicon Valley Bank and Signature Bank will get their deposits back in full, even if they’re over the FDIC-insured amount of $250,000.
FDIC has created Deposit Insurance National Bank of Santa Clara for this purpose.
What now? After the fall of these banks, there were worries that other banks may also fail.
However, the government is doing everything it can to stop that from happening – president Biden addressed the nation stressing the health of the US financial system and assuring tax payers that they’ll not bear any of the losses.
So it is unlikely that this will escalate into a large-scale financial disaster like the Great Recession of 2008.