Silicon Valley Bank collapsed Friday morning and was overtaken by federal regulators after experiencing the largest bank failure since Washington Mutual in 2008.
The Silicon Valley bank used to be the go to bank for U.S. technology startups and was among the top 20 American commercial banks with $209 billion in total assets at the end of last year, according to the FDIC.
Their fall began with the Fed sharply raising interest rates over the last year to cool inflation as they effectively snapped the momentum of borrowing costs for tech stocks that were helping the bank. In addition, these rising rates destroyed the value of the long term bonds the bank had bought when interest rates were almost nothing. They were getting an average yield of 1.79% on their $21 billion portfolio when the current 10 year U.S. treasury yield average is about 3.9%.
Customers began to pull out at the same time that the bank had announced they had been selling securities at a loss and would sell $2.25 billion in new shares. The stock started tanking on Thursday and by Friday, trading in SVB shares was stopped while regulators shut the bank down and placed it under the Federal Deposit Insurance Corporation.
The Fed does not see this becoming a common problem in the future as they claim any other banks that may experience this are too small to "affect the broader system." All insured depositors will have full access to their insured deposits by Monday morning, according to the FDIC and all uninsured depositors will receive an “advance dividend within the next week.”
https://www.cnn.com/2023/03/11/business/svb-bank-collapse-explainer-timeline/index.html
As I noted in my post, it's important that the Fed gets this situation of banks collapsing under control before they can get back to managing inflation. Although it is unlikely, continuing bank issues like this can become highly detrimental to our already struggling economy.
ReplyDeleteSeeing banks fail is always a noteworthy occurence, especially a bank as large as Silicon Valley Bank. From what I understand, SVB had their depositers money in investments that, due to the changes in interest rates you and the article mention, turned out to be poor investments, and because of this they didn't have all their depositers money. Customers began pulling out their money at the same time the bank announced they were selling at a loss, causing the failure. Hopefully this does not happen with other banks as a banking crisis is the last thing we need to add to our economic troubles right now.
ReplyDeleteIt's remarkable to observe how the rise in interest rates contributed to the bank's collapse, and how the subsequent collapse in the value of the long-term bonds they had invested in made matters worse.
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