The failure of Silicon Valley Bank (SVB) on March 10th has continued to send ripples through financial markets, raising fears of other regional banks going under and a wider economic downturn. As the Federal Reserve (a.k.a. the Fed) moves to prevent further instability, critics have begun to point fingers at various causes for the collapse.
Based in Santa Clara, California, SVB catered to start-ups and the tech industry. According to Reuters, it was the 16th largest bank in the United States at the time of its collapse. The Wall Street Journal reported the bank’s tenuous financial situation in the days leading up to the failure. SVB invested large portions of its assets in government bonds. Bonds are generally stable, safe investments held over a longer period of time. While the Fed raised interest rates to counter inflation, the interest rates paid on bonds remained locked in, meaning they lost value. SVB announced on March 8th that it was selling bonds, and shares in the bank, to meet withdrawal demands. Confidence-shaken customers rushed to withdraw their deposits, crippling the bank and caused it to be taken over by the Fed. The Federal Deposit Insurance Company (FDIC) protects all bank deposits up to $250,000. However, in an effort to maintain stability, the FDIC announced that it would insure all deposits held by SVB customers.
SVB’s collapse was followed by another bank failure just two days later, when Signature Bank in New York was closed by state financial regulators. Like SVB, the FDIC seized the bank’s deposits. It reached a deal with New York Community Bancorp on March 19th, which purchased $88.6 billion in deposits and $38.4 billion in loans from Signature. Meanwhile, eleven national banks (including J.P. Morgan Chase and Bank of America) coordinated with Treasury Secretary Janet Yellen (she/her) to save First Republic Bank, providing it with $30 million to ensure it could continue to supply customers with funds.
In the aftermath of the twin bank failures, financial experts and politicians are attempting to diagnose its cause, and if it was inevitable. Former Massachusetts Representative Barney Frank (he/him), who served on Signature Bank’s board, attributed the bank run to “the nervousness and beyond nervousness from SVB and crypto.” He disagrees with Senator Elizabeth Warren (D-MA, she/her). She blames the collapses on 2018 changes to legislation that bears his name, the Dodd-Frank Act, after Congress voted to loosen regulatory restrictions on midsize banks. In a March 18th letter to the Fed, Warren blamed bank executives for taking “unnecessary risks,” while also citing “a series of failures by lawmakers and regulators.” The New York Times reported that local Fed officials had be in contact with SVB about its weaknesses since 2021.