The Causes of the SVB/Signature Bank Collapse
The collapse of Silicon Valley Bank (SVB) and Signature Bank, two of the nation’s largest financial institutions, has sent shockwaves through the banking industry. With the Federal Deposit Insurance Corporation (FDIC) appointed as the receiver, many are left wondering what exactly happened and how we can avoid a similar situation in the future.
The story begins with SVB’s rapid growth during a period of artificially low interest rates, enabled by the Federal Reserve. SVB took in vast amounts of short-term deposits and invested heavily in government bonds. When the Fed raised rates to fight inflation, the bank failed to hedge against this risk and incurred losses on its bonds, making it harder to pay back depositors. Other, actually solvent banks would have hedged against the risk of the Fed raising rates by the end of 2021, yet SVB failed to do so.
The chasm between the yields of SVB bonds and those sold during the Fed’s tightening cycle created a net loss on SVB’s balance sheet. The bank’s Federal Reserve supervisors should have raised questions much earlier, but failed to do so. This deficit of interest coming in and out meant that SVB was destined for big operating losses, and the flood of withdrawals from depositors finally caused the bank to collapse.
It is unclear yet whether this particular case is a one-off or the start of a crisis. At this point, the Federal Reserve's most effective course of action is to take a break and reconsider its current strategy for fighting inflation. In the absence of other measures, inflation could be brought under control, but this would come at the expense of damaging a healthy and secure economy.
At the core, the SVB/Signature narrative is just like a classic bank-run story. The banks were destroyed due to a surge of withdrawals by their depositors. What could have caused this? This type of situation, while complex sounding, is fairly simple: There were not enough cash and liquid assets available that could be sold to fund deposit outflows, without wiping out the bank’s equity capital base. Banks are not required to carry enough cash to fund 100% of their deposits, and investments such as U.S. Treasuries or mortgage-backed securities, are generally longer-term in nature and are not always able to be sold or otherwise harvested at a profit.
Ultimately, SVB’s collapse was caused by a combination of factors.
0. “Region sidesteps brunt of SVB impact” Pacific Coast Business Times, 16 Mar. 2023, https://www.pacbiztimes.com/2023/03/16/region-sidesteps-brunt-of-svb-impact
1. “What's Next for Investors After the SVB Collapse?” Morningstar, 16 Mar. 2023, https://www.morningstar.com/articles/1144551/whats-next-for-investors-after-the-svb-collapse
2. “Opinion | How SVB ‘Profited' From Interest-Rate Risk” The Wall Street Journal, 16 Mar. 2023, https://www.wsj.com/articles/how-svb-profited-from-interest-rate-risk-accounting-rules-deposit-fdic-federal-reserve-coupon-held-to-maturity-ec43418a
3. “Opinion | In the Silicon Valley Bank debacle, greed and fear ruled, not the rules” The Washington Post, 15 Mar. 2023, https://www.washingtonpost.com/opinions/2023/03/15/silicon-valley-bank-greed-fear
4. “Silicon Valley Bank failed because it bet the money printer would never stop” Washington Examiner, 15 Mar. 2023, https://www.washingtonexaminer.com/opinion/silicon-valley-bank-failed-because-it-bet-the-money-printer-would-never-stop
5. “The economist who won the Nobel for his work on bank runs breaks down SVB's collapse—and his fears over what's next” Yahoo Life, 15 Mar. 2023, https://www.yahoo.com/lifestyle/economist-won-nobel-bank-runs-160025143.html
6. “Who Is Really to Blame for SVB and the Banking Crisis” TIME, 16 Mar. 2023, https://time.com/6263723/blame-for-silicon-valley-bank-and-the-banking-crisis/
7. “Inside Track: What SVB's Collapse Should Tell Us About Risk” Law.com, 16 Mar. 2023, https://www.law.com/2023/03/16/inside-track-what-svbs-collapse-should-teach-us-about-risk/