Silicon Valley Bank, which catered to many of the world's most powerful tech investors, collapsed on Friday and was taken over by federal regulators, becoming the largest U.S. bank to fail since the 2008 global financial crisis.
Then, on Sunday, regulators grew concerned about the financial health of New York's Signature Bank, largely because of its big exposure to the volatile crypto market.
Now, both banks are both under the control of the Federal Deposit Insurance Corporation, or the FDIC.
Regulators announced the takeovers after what was effectively a run on Silicon Valley Bank late last week when depositors rushed to withdraw tens of billions of dollars worth of deposits.
The collapse has sent shockwaves across the financial industry. Shares of small, regional lenders have been hammered; the bond market has swung wildly; and now, the pressure is on the Federal Reserve to dial back its interest rate increases even as inflation persists.
It's a lot to keep track of. Here's what to know.
What was Silicon Valley Bank?
Although it wasn't a megabank like Goldman Sachs or JPMorgan Chase, Silicon Valley Bank had punched above its weight during its 40-year history.
Based in Santa Clara, Calif., SVB's clients included venture capital firms, startups and wealthy tech workers. It had become a major player in the tech sector, in which it successfully competed with bigger-name banks.
"They really developed a niche that was the envy of the banking space," said Jared Shaw, a senior analyst at Wells Fargo. "They are able to provide all the products and services any of these sophisticated technology companies, as well as these sophisticated venture capital and private equity funds, would need."
Among its clients were tech and tech-adjacent companies like Roku, Roblox and Vox Media. (It turns out that this concentration in the tech sector was key to its demise.) But it remained little known outside of tech circles — until this past week.
Why did Silicon Valley Bank collapse?
Silicon Valley Bank's business had boomed during the pandemic as tech companies flourished. The bank's customers filled its coffers with deposits totaling well over $100 billion.
In 2021, when interest rates were at record lows, the cash-rich SVB invested billions of dollars into long-term U.S. Treasury bonds. Those bonds, which are backed by the U.S. government, are generally considered to be safe, modest investments. But they pay out in full only when they're held to maturity; otherwise, long-term bonds risk losing value if interest rates rise.
Which is, of course, exactly what happened in 2022, when the Federal Reserve began to aggressively raise interest rates in an effort to rein in rampant inflation. Those rate increases hurt the value of government bonds, including those held by SVB.
"The problem was they weren't worth 100 cents on the dollar, because they were long-term interest rates. Interest rates went up. They had to sell them at a discount," said Douglas Diamond, a professor of finance at the University of Chicago, in an interview with NPR. "And it could have been avoided if the supervisors had said, 'Look, we realize interest rates might be going up.' "
This wasn't a problem so long as SVB had no need for the cash. But the tech sector as a whole also took a downward turn in recent months, and companies increasingly began to withdraw their deposits from the bank.
In order to make good on those withdrawals, SVB had to sell part of its bond holdings at a steep loss of $1.8 billion, the bank said last week. That announcement spooked the bank's clients, who got worried about SVB's viability, and then proceeded to withdraw even more money from the bank — a textbook definition of a bank run.
On Thursday alone, clients raced to collectively withdraw an attempted $42 billion in deposits, and SVB's share value dropped by more than 60%. By midday Friday, SVB had been taken over by the FDIC.
What does this mean for other banks?
Other banks are not so precariously positioned as SVB was with its bond investments and exposure to the tech industry. Still, the bank run sparked concerns about the banking sector as a whole. Since last week, shares of all kinds of lenders, including the big banks, have sagged.
Other banks seen as potentially sharing some of the same risks as SVB saw their stock values plunge Monday, including First Republic Bank down more than 60% and Western Alliance Bancorp down nearly 50%. Investors feared that other lenders, especially smaller and regional ones, would suffer a similar surge in withdrawals and would struggle to meet the redemptions.
Even traditional banks have taken a hit: JPMorgan is down more than 7% since last week, while Wells Fargo and Bank of America were both down more than 15%.
Earlier last week, Silvergate, a California-based bank that caters to the cryptocurrency industry, announced plans to unwind its operations.
And on Sunday, regulators took over Signature Bank, a New York-based institution that expanded into the crypto industry in 2018 and saw $10 billion in withdrawals on Friday after SVB's troubles began. Crypto has been hit hard since last year.
Long-term, analysts say the broader banking sector is still likely to be healthy.
Bank analysts at Morgan Stanley said in a note late last week that SVB's troubles "are highly idiosyncratic and should not be viewed as a read-across to other regional banks."
"We want to be very clear here," they wrote. "We do not believe there is a liquidity crunch facing the banking industry."
Wells Fargo analyst Shaw also said other banks were hit by panic selling. "It's really just a fear that has gripped the market, and is sort of self-perpetuating at this point," he said.
What happens next for people who had ties to SVB and Signature Bank?
Federal officials say that all customers of SVB will have full access to their deposits — even accounts that held more than $250,000, the limit of FDIC insurance. Accounts holding greater than that amount made up the vast majority of accounts at SVB. The move essentially guarantees the $175 billion that was in customer deposits at SVB.
Deposits at Signature Bank will also be backstopped, they said. Operations at both banks resumed Monday, allowing account holders access to their funds.
That means that companies who relied on cash deposits at SVB for their day-to-day operations — to make payroll, for instance — should be able to carry on as normal.
Shareholders and some debtholders will not be protected, the FDIC says. Senior management has been removed from their jobs.
What happens next for everybody else?
Federal officials are taking measures to prevent a "contagion" from spreading to other banks. "The banking system is safe," President Biden said in remarks Monday morning. "Your deposits will be there when you need them."
The Federal Reserve Board has made funding available to other institutions to help shore up their cash reserves, a move that should help to stave off a catastrophic run at another bank.
Still, markets reacted strongly on Monday. The U.S. stock market was up and down over the course of the day. Government bonds rallied, sending their yields lower as investors sought safe investments.
The impact was felt most in the 2-year Treasury yield, which generally reflects investors' expectations of where interest rates are headed. That yield has dropped an entire point, from just over 5% to just under 4%, since the middle of last week.
All of this is happening just ahead of a Federal Reserve meeting next week, at which the Fed will announce whether it will raise its benchmark interest rate yet again.
The Fed's rapid interest rate increases over the past year have helped to slow inflation. But the increases have also devalued bond holdings, like the kind SVB invested in by the billions and helped cause its collapse last week.
Before the SVB collapse last week, markets had expected the Fed to raise interest rates by half a percentage point at its March meeting. Now, with the Fed under some pressure to ease the increases, those expectations have retreated.
"Clearly, we don't know the results of all of the recent, very rapid increases other than what we've started to see in the banking sector. And I think it really behooves the Fed to step back and just see the results of their handiwork before possibly making things worse," said Barry Ritholtz, chairman of Ritholtz Wealth Management, in an interview with NPR.
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