Jorden McVeagh, Editor
On the morning of Friday, Mar. 10th, Silicon Valley Bank collapsed. This collapse results in the second-largest banking collapse since the 2008 financial crisis. Regulators out of California closed the bank putting it under the control of the FDIC, which is responsible for formulating a plan of action. Many believe that they will liquidate most of, if not all, the bank’s assets in order to pay back customers.
A recent study conducted and published by the Social Science Research Network found nearly 200 other banks, 186 to be exact, are at risk of suffering the same fate. All that would need to happen is for depositors to withdraw their funds, leaving the bank with very little capital. Exactly how much money is at risk here? $300 billion to be exact. The big question at hand is how did this happen? It all comes back to interest rates. The FED has been increasing interest rates over the past months, and as of Feb. of this year, they have jumped to 7.17% for a 30-year fixed rate. Money deposited into a bank is typically then invested in low-risk government bonds. Interest rates influence government bond performance, and since they continue to increase, bonds are negatively impacted. The issue with SVB is that a good amount of their assets were in long-term bonds, meaning that they mature in 10 years or more. The SVB collapse occurred when they posted a massive $1.8 billion loss to match the number of customer withdrawals. In addition, the bank also announced $2.25 billion in new shares in order to recover some of the losses. This loss scared depositors into withdrawing whatever amount of money they had from the bank.
Higher interest rates lower the value of treasury securities as I mentioned above. Many regulators in the industry feel good about the tools in place to help fight further incidents from happening. In an interview with CNN Business, Deputy Treasury Secretary Wally Adeyemo tried to inform the public that they are on top of monitoring the banking system to prevent further collapses. In this interview, Adeyemo stated, “Federal regulators are paying attention to this particular financial institution and when we think about the broader financial system, we’re very confident in the ability and the resilience of the system… we have the tools that are necessary for incidents like what’s happened to Silicon Valley Bank” Whether he is saving face here or not we will see in the coming months. However, it was smart on his end to at least try to capture some trust back from the public. It will take some further research and analysis to get the full picture of what led to the collapse of SVB, but it is vital to the banking sector that it is done quickly before more depositors lose trust in the banks. As the US economy signals it is edging closer to a recession, losing trust in the banks going in is the last thing the public wants to happen.