Collapse of SVB, Signature Bank explained

Two banks have collapsed since Friday, the federal government swooped in to save the day, and there’s still a lot of uncertainty about what comes next.

Depositors at Silicon Valley Bank — which failed Friday after a bank run — and New York-based Signature Bank — which collapsed Sunday — will see their money guaranteed by the federal government. In a joint statement Sunday, the U.S. Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. said all deposits at both banks would be guaranteed — but not at the expense of taxpayers. Depositors were told they would have access to their money Monday.

The move was an attempt to alleviate systemic risk to the banking system and shore up public confidence, according to the statement. In other words, the federal government hoped to ward off the potential for a contagion of collapses that could destabilize the banking system and cause an economic crisis akin to the Great Recession, in late 2007 to mid2009.

Since 2001, there have been 563 bank failures, according to the FDIC, but these are the first since Kansas-based Almena State Bank in October 2020. SVB and Signature Bank’s collapses were the second and third largest in history, with Washington Mutual — which fell during the 2008 financial crisis — still No. 1.

The markets responded to SVB’s collapse with a swift decline Friday. On Monday morning, after the Fed’s joint announcement, markets were jittery, indicating high volatility in an uncertain financial climate. Bank stocks, especially regional bank stocks, have plunged.

How SVB and Signature Bank collapsed

In the joint news release, the Fed said: “The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry.”

But not all reforms have stuck. In 2018, under thenPresident Donald Trump, Congress rolled back DoddFrank Act regulations for regional banks with under $250 billion in assets. At the time of its failure, SVB had $209 billion, according to the FDIC. Senate Banking Committee Chair Elizabeth Warren, D-Mass., cited the rollbacks as a contributor to SVB’s collapse, saying the decision reduced “both oversight and capital requirements.”

So how did it happen? The simplest answer is a bank run, which happens when depositors withdraw their money simultaneously out of fear of insolvency. On Wednesday, CEO Greg Becker sent a letter to shareholders telling them that SVB had lost $1.8 billion on the sale of U.S. Treasurys and mortgage-backed securities. Becker indicated the bank planned to raise $2.25 billion to bolster its finances. This announcement sparked a panic among its customers, who collectively withdrew $42 billion from their accounts Thursday. By Friday morning, SVB had a negative cash balance of $958 million. The FDIC said it had taken over SVB and established the new Deposit Insurance National Bank of Santa Clara. (Disclosure: NerdWallet also banked with SVB before its closure.)

Then on Sunday, New York state regulators closed Signature Bank, a lender primarily serving real estate and law firms that recently started focusing on the cryptocurrency industry. A similar bank run happened at Signature. The

FDIC took over the same day and established a new Signature Bridge Bank N.A.

Without government intervention, the collapse of SVB could have been catastrophic for depositors with large accounts. Deposits are FDIC-insured only up to $250,000 regardless of whether the account was individual or corporate. More than 90% of SVB’s deposits were not insured by the FDIC, according to a Bloomberg analysis of recent regulatory filings. SVB was known as the bank of choice for startups, venture capitalists and tech companies. Its collapse Friday raised questions for some companies about whether they would be able to meet payroll.

Was this a bailout?

Calling this a bailout or not is semantics. Either way, the federal government wants to make sure you know that the burden is not falling on taxpayers. In the joint announcement, the trio of government agencies indicated the Deposit Insurance Fund would cover the money in depositor’s accounts. The Deposit Insurance Fund is funded through fees assessed on financial institutions as well as interest on government bonds.

President Joe Biden, in a televised address Monday morning, repeated this sentiment: “No losses will be — and I want — this is an important point — no losses will be borne by the taxpayers. Let me repeat that: No losses will be borne by the taxpayers.”

The Federal Reserve Board also announced it will make additional sources of liquidity through the creation of a fund that would safeguard deposits. The new Bank Term Funding Program will offer loans of up to one year to banks, savings, associations, credit unions and other eligible depository institutions that pledge U.S. Treasuries, agency debt and mortgage-backed securities as collateral. The program will have an initial $25 billion available made possible by the Exchange Stabilization Fund.

Will the Fed still raise interest rates?

The bank failures may soften the Fed’s stance on interest rates. The hawkish tenor of Fed Chair Jerome Powell, in his Senate testimony last week and with the February rate hike, indicated a 50-basis-point increase was likely for the March rate decision.

But the SVB and Signature failures have clouded that outlook.

In a widely reported analysis of the failures, Goldman Sachs said it no longer expects the Fed to deliver any rate hike at the March 22 meeting, adding they had “considerable uncertainty about the path beyond March.” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., was widely reported saying he expects a 25-basis-point hike at next week’s meeting.

As of Monday, the CME FedWatch Tool indicated the probability of an increase next week is between no hike and a 25-basis-point hike.

What happens next?

On Monday, Biden’s message aimed to assure Americans of the safety and strength of the U.S. banking system. He indicated management of these failed banks would be fired and investors in those banks would not be protected, and he called for a full account of how these failures happened. Finally, he called on Congress and banking regulators to strengthen the rules for banks to lessen the chances of additional failures.

The FDIC will facilitate buyers for SVB and Signature Bank. It will also sell off SVB’s assets to be used for future disposition.

SPENCER PLATT — GETTY IMAGES People walk by a Manhattan branch of Signature Bank which was closed by bank regulators on Sunday on March 13, 2023in New York City. The move by the state’s Department of Financial Services seeks to prevent a banking crisis spurred by the failure of Silicon Valley Bank.