Nearly everyone has already heard the news: Silicon Valley Bank (SVB), a trusted and reputable bank popular with tech startups and venture capital firms, collapsed on Friday. Its swift and relatively unexpected failure (predicted by only a few) is the second largest in U.S. history, shadowed only by the demise of Washington Mutual Bank in 2008 during the financial crisis. So why did this happen to SVB – and so quickly? And what will happen to its customers? Are they protected by the FDIC, and will they get their money back? Let’s consider this in more detail below.
Why exactly did Silicon Valley Bank fail?
Like most banks, SVB kept a small amount of its deposits in cash and bought long-term debt (like Treasury Bonds) with the rest. When interest rates were low, this was a solid strategy that resulted in modest but consistent returns. But as the Federal Reserve began raising interest rates to combat inflation in March 2022, the value of these investments dropped.
Around this time, amidst a volatile stock market and mass tech layoffs, late-stage tech startup investing had begun to dry up. This led many of the bank’s clients (who were primarily VC-backed technology and life science companies) to withdraw their funds, which meant SVB had to sell some of its long-term investments at a steep discount to fulfill the requests.
On Wednesday, March 8, 2023, the bank announced these losses (to the tune of $1.8 billion), panic ensued, and there was an old-fashioned run on the bank. By Friday, regulators stepped in and shut down the bank due to the size of its investment losses and all the simultaneous withdrawals. The swiftness of SVB’s fall from grace (and solvency) has stunned many.
Aren’t the bank’s clients protected by the FDIC?
The Federal Deposit Insurance Corporation (FDIC) is a government agency that was established during the Great Depression to restore the American people’s trust in the banking system. (Remember, many banks failed during that period.) Today, the FDIC insures bank deposits up to $250,000, which, unfortunately, won’t help many of SVB’s customers because they have millions of dollars in the bank. In fact, according to Time Magazine, over 85% of SVB’s deposits are uninsured.
On Friday, the FDIC officially took over the banking institution, giving it control of about $175 billion in customer deposits. By law, there is an order to how the FDIC must pay out the funds it has taken over – generally insured depositors get paid first (along with administrative costs), then uninsured depositors, and finally unsecured creditors and equity shareholders.
We’ll have to wait and see how the rest of the story unfolds. New York-based Signature Bank also collapsed on Sunday, and, according to Treasury Secretary Janet L. Yellen, government regulators worked all weekend to determine how to stabilize the banking system. As of today, Monday, March 13, 2023, SVB was reopened as the Deposit Insurance National Bank of Santa Clara under the FDIC, and depositors with less than $250,000 are being told that they should have access to all their funds.