What caused the failure of Silicon Valley Bank?
There is a simple answer and a complex answer to why the bank failed. The simple answer is that it is experienced bank run and had no cash on hand to cover the withdrawals. A bank run is when many depositors withdraw their funds at the same time. When the bank failed to provide funds to cover the withdrawals, regulators stepped in and shut the bank down.
The complex answer takes a broader and more complex view of why SVB was unprepared for the bank run. Interest rates have remained low since the 2008 financial crisis. For a while, Federal Reserve Chairman Jerome Powell instituted a zero interest rate policy (ZIRP).
While interest rates were at zero percent, the startups and technology companies that were SVB’s main clients experienced periods of significant cash flow. SVBs bank deposits grew as IPOs, SPACs and VC investments exploded at a rapid pace.
However, this meant that the bank’s customers did not need loans or financing, and loans are how banks make money. Simply put, a bank takes deposits and makes loans and earns a profit from the interest on the loan. But with fewer customers needing loans and all this cash from deposits, SVB needed other ways to make money.
So he started buying long-term government securities. The problem with this method is that if interest rates rise, these securities lose value. Instead of making money on credit risks, such as loans, SVB turned to interest rate risks on securities. As the Fed began raising interest rates to curb the glut, SVB’s stock holdings began to decline.
Another effect of rising interest rates was that VC firms stopped throwing money at tech startups as freely. Many of these businesses then needed to reach into their own pockets by accessing their funds deposited in the bank.
SVB moved quickly to release liquidity to cover what customers were withdrawing. It sold $21 billion in securities, causing an after-tax loss of $1.8 billion. It also announced plans to protect itself by selling $2.2 billion in stock, prompting Moody’s to downgrade its credit rating.
When SVB presented its slide deck explaining the situation on March 8, 2023, customers began to walk out in droves. Peter Thiel’s Founder’s Fund advised its portfolio clients to exit. Other VC firms like Union Square Ventures and Coatue Management have told their companies to get out as well.
The bank run happened in less than two days. Basically, the digital platform allowed customers to withdraw their funds electronically, and SVB had no way to intervene or quell the panic. On March 9, 2023, customers tried to withdraw $42 billion, about a quarter of the bank’s deposits. The share sale was canceled and SVB tried to sell itself.
On Friday, March 10, 2023, regulators stepped in and the bank closed.
Will SVB’s failure spread to other banks?
The collapse of SVB has all the makings of a trigger event for a full-blown financial crisis, but steps are being taken to prevent contagion before that happens. The images of the bank closing and customers standing at the doors will certainly remind people that the bank was in business on the infamous Black Tuesday (1929) that started the Great Depression as depicted in the film. It’s a wonderful life.
Fortunately, depression-era protections such as the Federal Deposit Insurance Corporation (FDIC) and government intervention could help stem the tide of panic. In one of the most significant steps taken by the government on Sunday 12 March 2023, it announced that all SVB deposit customers will be able to access their funds on Monday 13 March 2023. This includes customers whose assets exceed the FDIC insured amount of $250,000. .
The actions taken will hopefully prevent more bank runs and foreclosures. However, one bank, New York-based Signature Bank, also failed. With $110 billion in assets, it is the third largest bank failure in US history (the first being Washington Mutual in 2008).
The FDIC created a new entity, the National Deposit Insurance Bank of Santa Clara. All insured deposits have been transferred and the bank is scheduled to open on Monday, March 13, 2023.
The Fed also announced a new emergency lending program designed to prevent an increase in bank runs that could undermine the stability of the banking system and the economy as a whole. Under the plan, the Fed would lend freely to banks so that bank customers could remain confident that they could access their accounts when needed. In banking, customer trust is as important as cash. The loan program is designed to protect both.
Instead of selling securities to depositors (as SVB did), banks can borrow from a lending program using their securities as collateral. The Treasury has set aside $25 billion to cover any losses from the program, but does not expect a large loss because the securities used as collateral have a very low risk of default.
What happens to SVB’s customer line of credit?
As of the bank’s closing on March 10, 2023, the FDIC has announced that all credit accounts are permanently frozen. Line of credit customers must open a new line of credit at another bank.
Loan customers are advised to continue making their scheduled loan payments. There may be more updates as this story develops.
Does this affect the line of credit offers through UCS?
All of United Capital Source’s customer lines of credit are unaffected by the SVB closure and its ripple effects in the economy.
For customers who have a line of credit provided by UCS, you can continue to use the funds as you need them. Common for UCS.
What are the implications for the future of business lending?
The full impact of SVB’s sudden closure on business lending and banking in general remains unclear. The Fed is doing what it thinks is the best way to make SVB deposit customers whole. It provides bank lending services to prevent more bank runs from escalating the situation. Hopefully, the actions taken will resolve the issue with zero or very minimal impact on business lending.
However, the story is still evolving and things may change in the future. For example, the 2008 financial crisis caused many traditional banks to become much more restrictive in lending. As a result, alternative lenders and lending marketplaces like UCS have become the go-to financing solution for the small business community.
SVB Collapse – Final Thoughts
When news spread across the nation 16th As the largest bank collapsed, many of us in the financial sector began looking for answers. It’s natural to wonder what this means for banking institutions and the people who rely on them. At the time of writing, we know steps are being taken to reduce the risk of this situation snowballing into a huge financial threat.
Economic doomsayers will use this situation to claim that the sky is falling, but panic is the only thing that can make things worse. We will keep you informed of any new developments regarding the implications, particularly those affecting small business funding.