Explaining the Aftermath of the Silicon Valley Bank Failure

The federal government took over the California-based Silicon Valley Bank on March 10, the first bank to fail in the U.S. since 2008. Questions have arose since then of how and why it happened plus the effect it will have on North Jersey residents. We attempt to answer those questions for you below.

What was Silicon Valley Bank?

Silicon Valley Bank (SVB) was a commercial bank headquartered in Santa Clara, CA. SVB was founded in 1983 to focus on the needs of startup companies. A state-chartered bank and member of the Federal Reserve System, SVB was the 16th-largest bank in the U.S. at the time of its failure on March 10.

What was the company’s business model?

The bank structured its loans with the understanding that startups do not earn revenue immediately, managing risk based on their business model. The bank connected customers to its extensive venture capital, law, and accounting firm network, collecting deposits from businesses financed through venture capital. The bank’s customers were primarily businesses and people in the technology, life science, healthcare, private equity, venture capital and premium wine industries.

Why did it fail?

In 2022, SVB began to incur steep losses as the Federal Reserve increased interest rates and a major downturn in growth in the tech industry, where the bank’s liabilities were heavily concentrated. As start-up funding began to dwindle, its clients had to tap into their accounts more. The bank had a significant number of big, uninsured depositors who tend to withdraw their money during signs of turbulence. 

A bank like SVB takes deposits from clients and invests them in generally safe securities, like bonds. But as the Federal Reserve has increased interest rates, those bonds have become worth less. 

On March 8, SVB’s parent company, SVB Financial Group, said it would undertake a $2.25 billion share sale after selling $21 billion of securities from its portfolio at a nearly $2 billion loss. 

Meant to shore up its balance sheet, it actually had the opposite effect as clients began to withdraw their money because they believed the bank may cease to function in the near future. Regulatory filings from December 2022 estimated that more than 85% of SVB deposits were uninsured. 

When was SVB Taken Over?

Several hours after examiners from the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC)—which was created in the wake of the Great Depression to insure up to $250,000 in deposits—arrived at the offices of SVB to assess the company’s finances on March 10, the California Department of Financial Protection and Innovation issued an order taking possession of SVB citing inadequate liquidity and insolvency and appointed the FDIC as receiver. 

The FDIC then established a deposit insurance national bank, the Deposit Insurance National Bank of Santa Clara, to re-open the bank’s branches on March 13 and enable access to insured deposits. That same day, the FDIC transferred SVB assets to a new bridge bank, Silicon Valley Bridge Bank, N.A.

An initial auction of SVB assets on March 12 attracted a single bid, which was rejected.

A few days after SVB’s failure, the Federal Reserve Board, Department of the Treasury, and the FDIC announced that it would “make available additional funding to eligible depository institutions,” which would reimburse depositors in full. That funding will come from loans from the newly created Bank Term Funding Program.

What is the Biden Administration’s Focus Now? 

President Joe Biden said the Americans can be “rest assured” his administration is acting to ease uncertainties about the banking system, with a focus on protecting U.S. workers and small businesses. Biden said “the management of these banks will be fired. If the bank is taken over by FDIC, the people running the bank should not work there anymore.”

The U.S. Justice Department and the Securities and Exchange Commission are separately investigating the collapse of SVB for any wrongdoing. ​​The DOJ investigation is examining stock sales that SVB officers made days before the bank failed, while SEC’s enforcement probes often involve examining whether a firm accurately disclosed financial risks or business uncertainties before a negative event.

What Role Did Dodd-Franks Play?

In the aftermath of that 2008 crisis, Congress passed the Dodd-Frank financial-regulatory package that was intended to prevent collapses in the banking industry. In 2018, President Donald J. Trump signed a bill that reduced how often regional banks had to submit to stress tests by the Federal Reserve—a move that banking experts argued might have forced the bank to better handle its interest rate risks had it not been rolled back.

“During the Obama-Biden administration, we put in place tough requirements on banks like Silicon Valley Bank and Signature Bank, including the Dodd-Frank Law, to make sure the crisis we saw in 2008 would not happen again,” said President Biden March 13. “Unfortunately, the last administration rolled back some of these requirements. I’m going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely that this kind of bank failure will happen again and to protect American jobs and small businesses.”

While Democrats have pointed to the rollbacks, some conservatives have suggested it was a result of a prioritising a woke agenda—such as climate change, abortion rights and diversity, equity, and inclusion initiatives—over standard banking practices.

Will more banks fail?

After SVB, New York state regulators shut down Signature Bank, which had become an important lender in the crypto industry, on March 12. Signature Bank, which provided lending services for law firms and real estate companies, had assets of less than $100 billion across 40 branches in the country. In 2018, the 24-year-old bank began taking deposits of crypto assets that crippled the bank after the collapse of the FTX cryptocurrency exchange.

Besides SVB and Signature, market experts expressed concerns around San Francisco’s First Republic Bank as well. The share prices of multiple regional banks, such as First Republic, PacWest, and Western Alliance, plunged on March 13 as Wall Street investors were unsure of the government’s pledge that the banking system is fine and everyone’s money is safe.

A hopeful sign that SVB and Signature would be contained is that regional bank stocks, some of which lost nearly half their value, rebounded in early trading on March 14. 

What is the effect for New Jersey?

The state announced a $35 million support package for New Jersey entrepreneurs affected by the SVB crisis.

The Angel Match Program will be funded with $20 million and will aim to help early-stage businesses with bridge funding gaps as they scale operations and refine products. The New Jersey Entrepreneur Support Program will be funded with $5 million to offer a guarantee to support repayment of an investor loan advanced for working capital purchases. The program was designed to encourage investors to support businesses within their portfolios during this liquidity crisis when investor support is crucial. 

Gov. Phil Murphy said the programs are being offered so that “that every New Jersey company caught up in this mess is able to keep the lights on, meet payroll, pay rent, and continue their day-to-day operations.” The former Goldman Sachs executive believes the current banking crisis will have effects on U.S. monetary policy and the economy this year.

“My gut tells me this lessens the likelihood of the (Federal Reserve) not raising rates at all next week or lessen the scale of those rate increases,” Murphy said March 13. “It also increases the chances of the nation and, we are not immune to this, a tougher economy in the six to 12 months ahead. I am hoping for the best but prepared for the worst.”