California-based commercial lending giant Silicon Valley Bank had its charter revoked and was transferred into receivership on March 10 after a bank run – which occurs when too many clients try to get their money out at once. The collapse sent shockwaves rippling across the financial world. What exactly happened? And what’s next? Sputnik explains.
At the beginning of the workweek, Silicon Valley Bank (SVB) was, on paper, America’s 16h largest bank, with some $209 billion in assets and $175.4 billion in reported deposits, and more than 8,500 employees at branch offices around the world.
On Friday, the bank’s doors were closed and it was taken over by the Federal Deposit Insurance Corporation, which set up a new entity – the ‘Deposit Insurance National Bank of Santa Clara’, and told SVB employees that they would be kept on for 45 more days before being booted out the door. The DINBSC will open up on Monday, and over the coming month and a half, will gradually liquidate itself, making dividend payments to uninsured deposit holders (which account a whopping 93 percent of all deposits, according to Securities and Exchange Commission filings), and payouts to clients with holdings of less than $250,000 (the standard deposit insurance amount). After that, after nearly forty years in the business, SVB will be no more.
What Happened?
It’s too early to say whether foul play had any major role in SVB’s collapse. It is known that the bank’s chief executive officer, Greg Becker, offloaded $3.6 million in company stock just two weeks before SVB folded, and that he outlined the financial scheme enabling him to do so on January 26. Becker wasn’t alone. Through the month of February, chief financial officer Daniel Beck, general counsel Michael Zucker and chief marketing officer Michelle Draper Michelle Draper each sold a large percentage of their stocks in the bank as well.
But it’s important to distinguish correlation from causation. The root of the problem, says banking expert David Tawil, is Fed interest rate policy. As Tawil explained to Radio Sputnik on Friday, SVB’s collapse was the result of the Federal Reserve’s policy of aggressive interest rate hikes over the past year to try to get a grip on inflation. SVB, like many others, bought billions in long-term, low-risk, low-interest Treasury bills, whose value fell as interest rates jumped, leaving the bank short and needing to sell off those Treasuries at a loss.
And that’s exactly what happened. On Wednesday, after reporting $1.8 billion in losses in its Treasuries and mortgage-backed securities holdings, the bank announced plans to raise $2.25 billion in capital via a share sale, prompting venture capital firms to urge clients to get their money out, and customers rushing the bank, causing stock prices to plummet. Within hours, a rattled stock market began a selloff, and major banks including JPMorgan, Bank of America, Wells Fargo and Citigroup saw over $52 billion shaved off their market value. Trading of SVB halted Friday morning.
The Biden administration seemed oblivious to the brewing disaster (or apparently hoped the American people would be). The past three days’ worth of statements by the White House press office made no mention of SVB, but did include a “fact sheet” on how President Biden’s budget “advances equity,” featured a joint statement from Biden’s meeting with European Commission chief Ursula von der Leyen, as well as an explainer on the American rescue Plan’s “top 15 highlights from 2 years of recovery.”
The Treasury released a brief statement Friday indicating that Secretary Janet Yellen had met with regulators to discuss SVB, in which she “expressed full confidence in banking regulators to take appropriate actions in response” to the bank’s collapse, stressed “that the banking system remains resilient and [that] regulators have effective tools to address this type of event.” The statement did not elaborate on what these measures were.
President Biden and California Governor Gavin Newsom also apparently discussed the bank’s failure, with the White House saying the two men “spoke about Silicon Valley Bank and efforts to address the situation,” again without any details.
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