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.[0] 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.[1]
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.[2] 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.[3] 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.[4]
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.[4] The bank’s Federal Reserve supervisors should have raised questions much earlier, but failed to do so.[3] 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.[5]
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.[6] 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.[6]
At the core, the SVB/Signature narrative is just like a classic bank-run story.[1] The banks were destroyed due to a surge of withdrawals by their depositors.[1] What could have caused this?[1] 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.[1] 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.[1]
Ultimately, SVB’s collapse was caused by a combination of factors.[7]
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/
