What happened to Silicon Valley Bank?
Last week, Silicon Valley Bank collapsed and was taken over by regulators. On 12 March, another bank, Signature Bank, also closed down. On the same day, the government was forced to intervene to protect depositors and create access to cash volumes for other financial institutions.
Since 2020, Silicon Valley Bank SIVB has been buying assets that are considered 'safe'. Among them: US Treasuries and mortgage bonds. But if interest rates are rising quickly, fixed interest payments on them can't keep up with rates. Consequently the asset price has fallen and the bank has recorded a loss of more than USD 17 billion. During the past week the bank was approached en masse by depositors, who demanded the withdrawal of their deposits in the amount of $42 mn. The financial institution was unable to meet this demand for cash.
The "raid" on the bank came after the bank announced the sale of a large amount of securities at a loss. Importantly, Silicon Valley Bank served mainly venture capital and technology start-ups. Corporate customer deposits exceeded the Federal Deposit Insurance Corporation's insurance limit of US$250,000. At the end of 2022, SVB had more than $150bn in deposits that were not insured.
Going deeper into the situation, Silicon Valley Bank could have avoided such a mistake, it only needed to give time for the bonds to grow in value and from them to cover the outflow of deposits, but there was not enough time.
SVB's problems affected Signature Bank, as its depositors also expressed a desire to withdraw their money. Signature's main customers were private companies and cryptocurrency firms. But like SVB, Signature Bank had a relatively large volume of uninsured deposits. And another crypto-oriented bank, Silvergate Capital, announced a possible closure.
The FDIC's March 10 statement talked about reimbursing depositors until Monday, March 13. But there are complications with the reimbursement amounts: initially it said that uninsured depositors would receive dividends and then certificates for the remaining deposits, which would be paid out within a certain time frame. But a little later the FDIC, the Treasury Department, Secretary Janet Yellen, the Federal Reserve and President Biden said to use the "systemic risk exception" and that uninsured depositors should receive guarantees from the government. It was decided that if funds from the sale of the bank and its assets were not sufficient, all losses of the Deposit Insurance Fund to cover them would be recovered through a special contribution levied on banks.