On Friday, Silicon Valley Bank (SVB) was shut down by regulators, making it the largest US bank failure since the Global Financial Crisis in the late 2000s (and second largest in US history). Then, on Sunday, state regulators in New York closed Signature Bank to prevent further damage to the wider economy.
Here are the possible outcomes and what investors might expect.
What the hell happened to Silicon Valley and Signature?
Several things caused the sudden downfall of SVB. Most of SVB’s customers are tech and venture capital companies, as well as executives for these firms. To attract clients, SVB offered higher rates on deposits compared to many larger competitors. To fund these higher rates, SVB bought long-term, high-yielding bonds when it had lots of cash. But that was before the Fed started aggressively raising rates and the venture capital market faced some challenges. The value of most of those bonds SVB bought has dropped a lot (bond values generally decrease as interest rates increase), causing big investment losses.
“This is a classic asset-liability mismatch, triggered by higher rates, and made worse by leverage,” according to Jurrien Timmer, director of global macro at Fidelity. “Some banks have offered to pay higher rates to their depositors, but as the Fed has raised rates and bond values decreased, banks like SVB are taking losses on their bond assets.”
Making things worse, SVB kept a lower level of deposits on hand and invested a larger percentage of its capital to try and pay its relatively higher rates. As a result, SVB has been in a weaker position than most other banks.
Also, some people think that SVB had a reputation for not having very strict lending standards. It is believed that the quality of loans to some riskier venture-backed companies with deposits at SVB has gotten worse over the past year. Many of those firms have faced major financial pressure as rates have risen and getting capital has become harder compared to the low interest rate environment from just a few years ago.
After SVB announced recently that it lost $1.8 billion in asset sales, the bank couldn’t get more investment capital and many customers quickly took out their deposits. Everything came to a head with Friday’s takeover by regulators.
“There’s an old saying that the Fed tightens until something breaks,” Timmer adds. “It looks like we have a sense of what is breaking during this Fed cycle.”
Like SVB, Signature Bank’s clients included many tech and venture capital companies, and after SVB’s failure, those clients quickly withdrew their funds from Signature, causing its collapse.
Are customers of SVB and Signature Bank screwed?
At first, it wasn’t clear what would happen to SVB and Signature Bank depositors who had more than what the FDIC standard insurance covers ($250,000 per depositor, per insured bank, for each account ownership category), but the Fed, FDIC, and Treasury made a joint statement over the weekend saying that depositors would have access to all their money starting Monday, March 13.
Will the stockowners in these banks be getting a ‘bailout’ as well?
Of course, investors in SVB have taken a big hit, and regional bank stock prices were lower on Friday after news of SVB’s failure came out. But the effects on other financial companies, markets, and the economy will hopefully be limited.