The collapse of Silicon Valley Bank (SVB) on Friday has raised concerns of an incoming banking crisis. People online have been voicing their fears that, without government intervention, there will be a contagion among other financial institutions and a run on the banks.
The meltdown of the 40-year-old bank is the biggest by assets since the 2008 financial crisis. For many, the run on the bank last week caused fears that something similar to the crash of 15 years ago might happen again. It led to SVB's collapse within 48 hours of the bank saying it was selling its assets. This suggested to its depositors that SVB was short on capital.
A bank run happens when a large number of its customers ask to withdraw their deposits at the same time over concerns of the bank's solvency. As more people withdraw their money, fears over the bank's solvency grow into a widespread panic. This increases the probability of the bank going into default. While the bank would have not normally gone into insolvency, customers' fears become a self-fulfilling prophecy.
But the situation is now very different from the 2008 financial crisis. SVB's deposits were unusually sensitive to interest rates. Its client base was unique, attracting primarily tech startups—a sector that experienced a boom during the years of the pandemic. While there were notable bank runs during the 2008 financial crisis—on Washington Mutual, for example—the failure of large investment banks like Lehman Brothers was because of a credit and liquidity crisis involving derivatives and asset-backed securities.
The collapse of the California-headquartered SVB—a rather obscure, business-focused lender that was also the 16th largest in the U.S.—was mostly down to a series of ill-fated investment decisions.
SVB had invested billions in long-dated U.S. government bonds, including mortgage-backed securities. This is an asset that was particularly vulnerable to the Federal Reserve's decision in 2022 to hike interest rates. As rates rose, the price of bonds fell, and SVB's bond portfolio suddenly lost value. On top of that, tech companies—especially those headquartered in the Silicon Valley—struggled in 2022 amid changing economic conditions and drops in revenues.
As tech companies started drawing on their deposits with the bank, SVB was forced to sell its bonds for liquidity. This caused investors and customers to panic. On Friday, the bank officially collapsed, forcing the U.S. federal government to step in.
The legitimate fears of a bank run spreading to the entire financial sector were raised over the weekend. But these were dispelled after the Biden administration on Sunday vowed to guarantee that depositors with money in SVB will be paid back in full. They will be able to access their money on Monday morning.
A second financial institution, New York-headquartered Signature Bank, closed on Sunday. Regulators said that keeping the bank open could threaten the stability of the entire banking system. In a tell-tale sign of what a widespread bank run feels like, Signature Bank's customers had started withdrawing their deposits on Friday, a source told The New York Times.
According to the newspaper, Signature Bank was convinced it could weather the current difficulties and come out from the SVB storm, especially as withdrawals started slowing by Sunday. The bank was surprised when seized by regulators on the same day.
These moves from regulators should stave off the collapse of other banks—though they don't amount to a full bailout of SVB. The Federal Reserve and the Treasury cannot execute a bailout, or force a merger to save a bank. As it happened in 2008, to bail out SVB, a larger bank must step in to acquire it, or Congress has to approve a taxpayer-funded bailout, a move that has so far not been discussed.
Should You Be Worried About Your Money?
If your money was in SVB, you'll be able to get your deposit back in full, whether you were or weren't insured. According to a joint statement by the Federal Reserve, SVB depositors will "have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer."
If you didn't have any money in SVB, you should hardly worry about other banks also imploding. The circumstances surrounding SVB's failure are very rare, if not almost unique. Also, the Biden administration's latest decision has made it extremely unlikely for contagion to spread throughout the banking system.