Silicon Valley Bank: Why America’s Bank Failed (And What the US Federal Reserve’s Bailout of Its Customers Means)

Silicon Valley Bank is the biggest bank failure in the US since the 2008 financial crisis, and its fall on Friday briefly fueled fears of another chain collapse like the one that rocked the world economy at the time.

In order to avoid a “contagion effect” in the rest of the banking industry, the authorities were working at full steam over the weekend.

Thus, on Sunday afternoon, it was announced that all depositors can withdraw their money, and at the same time they informed closing of another bank: Signature.

In just three days, two banks collapsed and were forced to cease operations.

This Monday, the President of the United States, Joe Biden, assured that the nation’s financial system is safe, confirming an attempt to calm down after the rapid and surprising collapse of banking entities that raised fears of an even wider crisis.

“Your deposits will be there when you need them”he confirmed, adding that bank directors will have to be replaced, and the money that will be returned to clients will not be paid by taxpayers.

The return of these funds to all depositors will be financed with the funds Deposit Guarantee Fund (DIF) which was created for emergency situations.

This fund is regularly financed by quarterly payments from the banks themselves and interest generated by government bonds.

Americans must “be confident that our banking system is safe,” Biden said. According to the president, SVB clients will be able to access their money from this Monday.

The American president also addressed investors, telling them that they will not be protected: “They took a risk and when the risk does not pay off, investors lose money.” That’s how capitalism works.”

Experts claim that the government tried to protect itself in order to avoid public outrage The 2008 Wall Street bailout funded by taxpayers.

But how did he get here?

Crisis timeline

What is Silicon Valley Bank?

Silicon Valley Bank was founded in 1983 in Santa Clara, California and has experienced rapid expansion over the past decade.

His main clients, as the name suggests, were technology companies settled on the west coast of the United States.

There was a key lender to many start-ups, known as run.

In fact, SVB was the banking partner for nearly half of the US-backed healthcare and technology companies that went public last year.

The bank had 8,500 employees worldwide, although most of its operations were in the US.

The first branch that the bank opened outside the country was in the United Kingdom, which was bought by the giant HSBC after its collapse for a symbolic price of 1 pound sterling (1.21 US dollars).

Why did it crash?

Two main factors shook the bank last year: the decline in the value of shares of technology companies and the aggressive growth of interest rates in the United States to address inflation.

In the last two years, the bank has bought a large number of fixed income bonds, an investment that is usually considered safe, along with customer deposits.

However, when interest rates rise, bond prices fall, so the SVB investment lost value.

This would not have had major consequences if they had been able to hold these bonds for several years. However, the current economic situation meant that many of his clients, illiquiddecided to use their deposits.

These clients did not find another way to finance themselves and continue to pay, for example, salaries to their workers, because they preferred not to take on debt due to high interest rates, and they did not find large investors who wanted to take risks. by allocating funds for newly established companies.

In this way, SVB’s clients started withdrawing their deposits, and since the bank did not have enough liquidity to meet their demands, it was forced to sell those bonds at a loss.

And so it was until last Wednesday, March 8, when the bank announced it was trying to raise $2.25 billion to cover those losses.

The announcement set off a spiral of fear, with clients beginning to withdraw their funds for fear of losing them.

Because, according to American law, the deposits were insured up to USD 250,000, clients and companies whose funds exceeded that figure – almost 90% of Silicia dolina bank’s accounts – feared that they could lose all their money if the bank went bankrupt.

Panic began to spread until on Thursday the entity’s shares fell more than 60%.

What are the first steps taken?

Faced with that freefall, which sparked a global selloff in bank stocks, US regulators stepped in and shut the bank down on Friday.

The entity is left in the hands Federal Deposit Insurance Corporation (FDIC), an independent federal agency that was created after clash from 1929 and whose mission is to guarantee and recover money from the bank’s clients in case of bankruptcy.

In this way, the FDIC managed to protect the remaining deposits in the bank, which amounted to about 175 billion dollars.

The agency announced that clients with insured deposits will have access to their money on Monday and that the money collected from the sale of the bank’s assets will go to uninsured depositors.

Given the fear that other banks could be exposed to the same risk swept away by the panic of their customersthe same US Treasury Secretary, Janet Yellen, expressed on Friday her confidence in the “strength of the banking system” after a meeting with the main regulators of the sector, to whom she conveyed her “absolute confidence that they will take appropriate measures”.

What did the Federal Reserve do?

On Sunday, fearing a crisis of confidence in the banking system, the Federal Reserve and the government announced new emergency funds to protect all SVB deposits, not just insured ones.

The American authorities wanted to calm the markets with all their might. That same Sunday evening, after a busy weekend, Janet Yellen, Federal Reserve Chairman Jerome Powell and FDIC Chairman Martin Gruenberg said in a joint statement that all clientsincluding those whose funds exceed the maximum level provided by the government, will be reimbursed.

This will not only affect Silicon Valley Bank, but also another smaller entity, SignatureBankbased in New York, which was shut down by the FDIC on Sunday.

Signature’s clients have also been strongly tied to the technology and cryptocurrency sector.

On the other hand, the Federal Reserve has also announced that it will offer help through a new financing program, which will make it easier for banks to get loans in a crisis.