What Does Silicon Valley Bank's Collapse Mean For Business?
As a DC business lawyer, I’ve closely followed the news of Silicon Valley Bank's collapse. This financial institution has been a major player in the tech industry, providing funding and support to many startups and small businesses that have made Silicon Valley a hub of innovation.
The collapse of this bank raises essential questions about what it means for the future of business in the tech industry and beyond. In this post, we’ll explore the implications of Silicon Valley Bank's collapse and what businesses can do to prepare for the potential fallout.
Why Did the Silicon Valley Bank Collapse?
Financial experts identify three factors as the causes of the failure of the Silicon Valley Bank (SVB), headquartered in Santa Clara, California. One, in March of 2022, the Federal Reserve started raising interest rates.
Two, in response to the higher interest rates, SVB had to sell off a substantial amount of its assets, including U.S. Treasury bonds. The interest rate increases sent the bond market into a nosedive, so SVB sold its government bonds at a loss of nearly $2 billion.
Three, there was a bank run, meaning that too many people with money deposited in SVB tried to withdraw their money all at once, exceeding the bank's cash reserves after the losses from the bond sale.
What Sparked the Bank Run?
After some large venture capitalist firms learned of the bond sale loss, they recommended that some companies withdraw their money from SVB. These were companies in which the venture capitalist firms had invested.
The firms did not want to lose their investments. As the word spread of the substantial withdrawals, more SVB depositors withdrew their money, creating a bank run.
What Have Regulators Done So Far?
The Silicon Valley Bank is in California. The state financial regulators took control of the bank and shut it down. The regulators gave control of SVB's assets to the Federal Deposit Insurance Corporation (FDIC).
The FDIC protects bank depositors by guaranteeing deposits up to $250,000. The FDIC has kept this promise ever since the government founded the FDIC in 1933. FDIC-insured accounts do not lose any money when a bank closes, up to the limits of the insurance.
The Silicon Valley Bank held many business accounts that exceeded the typical $250,000 FDIC limit. The federal government assured SVB's depositors that they would be made whole, meaning that, even if their accounts exceeded $250,000, they would get all of their money back.
Are Other Banks at Risk?
Perhaps. Signature Bank collapsed when depositors demanded their money soon after SVB failed. Bank stocks of regional banks sharply declined.
Another bank failure could happen, particularly if a bank does not have sufficient cash reserves and has to sell some of its government bonds at a considerable loss. Thankfully, many regional banks and bigger banks have more cash reserves than SVB did.
What Does the Silicon Valley Bank Collapse Mean for the Economy?
There is at least a temporary weakness in the financial environment caused by the SVB getting closed by California regulators. Smaller banks are hesitant to make loans, making it harder for start-ups and other businesses to raise capital.
Wall Street is still dealing with the shock waves from the SVB and Signature Bank closures. Bank runs could continue to happen. Banking services like loans could be harder to acquire for the time being.
Deposits in banks might cool for a while as some people fear that the SVB collapse could be the first of many such failures. Depositors could start pulling their assets from banks as they did during the great recession.
Why is Silicon Valley Bank Important?
Panic can spread like wildfire when people are afraid that they will lose their money. Just days after the collapse of SVB, there was a similar bank run on another bank, this one in New York.
Depositors at Signature Bank withdrew more than $10 billion dollars from their accounts in one day, causing the New York bank to fail. Signature Bank was the third-largest bank collapse in our country's history.
People have questioned the stability of the financial system and asked whether there will be another global financial crisis as in 2008. Will other banks collapse? The federal government assures the public that our banking system is safe.
What Does it Mean When Banks Collapse?
Banks accept money that people and businesses deposit into their accounts. The bank uses that money to (hopefully) make more money.
When a bank makes poor investment choices combined with circumstances like rising interest rates, the bank might have insufficient cash on hand to satisfy withdrawal demands from depositors. The shortfall behind a bank's cash reserves and withdrawal demands from depositors can cause a bank to fail.
How is This Different from the 2008 bailouts?
The Silicon Valley Bank was the largest bank to collapse since 2008. SVB had deposits totaling $175.4 billion as of the end of December 2022. Regulators took appropriate actions to stabilize SVB in the U.S. and SVB UK.
Washington Mutual Bank had $307 billion in assets when it collapsed in 2008. The Washington Mutual collapse nearly destroyed the financial systems on a global scale.
Following the Washington Mutual failure, more regulations are in place to prevent banks from risking depositors' money on high-risk investments. Also, in 2008, the FDIC insurance limit was $100,000 per account holder, and now it is $250,000. The higher guarantee limit reduces the consequences of bank failures on depositors.
Is There Any Risk That More Banks Might Fail?
In response to SVB's collapse, President Joe Biden is urging federal regulators to beef up the safeguards for mid-sized banks, meaning those with between $100 billion and $250 billion in assets. Some of these reforms would include:
Requiring a higher amount of liquidity for these banks;
Considering how quickly news of bank losses and massive withdrawals can spread on social media and lead to a bank run;
Making these banks create an "emergency plan" for an orderly closure if they fail, including how their closure plan would protect the financial system from negative consequences; and
Updating and increasing the frequency of stress tests to align with current economic conditions.
President Biden wants to use the lessons learned from SVB's failure to create more protections for customers' deposits. and provide more security for small businesses.
Will This Trigger a Banking Crisis?
The recent bank failure likely will not trigger a string of bank collapses or impact the broader economy. Customer deposits are expected to remain safe.
SVB was a unique financial institution with a high concentration of companies in the tech sector and significant influence from venture capital funding. The tech industry can be volatile. Tech companies are often at higher risk than more traditional businesses. Most other banks do not have this unusual set of facts, so the banking system is unlikely to experience a crisis.
Some other banks have shown signs of stress. For example, First Republic Bank saw its shares drop 65 percent, so trading in its shares got halted temporarily. PacWest Bancorp shares went down 25 percent the same day, leading to a pause in the trading of their shares.
What Does All This Mean for Your Business and Assets?
The FDIC stepped in quickly and took swift action intended to prevent another massive financial crisis like the one we saw in 2008. The financial sector and government banking regulators learned valuable lessons from the 2008 economic collapse.
The FDIC has assured the public that they will protect depositors with insured accounts. The Biden administration promised to ensure uninsured depositors lose no money.
The tech industry learned the hard way they need to have contingency plans in place if their financial institution fails, whether it is a regional bank or another institution.
How Do I Protect My Money From Another Bank Collapse?
You can limit the amount you hold in any one bank. The FDIC insures up to $250,000 per depositor per insured bank. Your first action should be to ensure your bank participates in the FDIC insurance program.
If your bank has FDIC insurance, you don't need to apply for it separately. When you open an account in an FDIC-insured bank, your deposits in that account will be automatically covered up to the coverage limit.
Also, not all financial products, investments, and accounts are FDIC insured. Traditional deposit accounts have automatic FDIC insurance in banks participating in FDIC insurance. These accounts include the following:
Checking and savings accounts
Certificates of Deposit (CDs)
Some prepaid cards
Money market deposit accounts
These financial products are not FDIC-insured, even if you bought them from a bank with FDIC insurance:
Stocks, bonds, and mutual funds
U.S. Treasury bonds, notes, or bills
Life insurance policies
Annuities
Municipal securities
Crypto assets
In the event of the failure of a bank, the FDIC will first pay depositors up to the limit of the FDIC insurance. These payments usually happen on the next business day. The FDIC will then act as the receiver of the closed bank.
The FDIC will collect the bank's assets, sell off the total assets, and pay the depositors with uninsured funds. Uninsured funds are those that exceed the amount of FDIC insurance. The asset sale process can take a few years.
Depositors with uninsured funds might not receive 100 percent of their money. In the situation of SVB, however, after the regulators closed the bank, the government guaranteed the deposit account in full.
A DC business attorney can discuss developing a strategy to protect your business and personal assets from losses. Contact Thienel Law today.
