FDIC Shutdown Of SVB Sparks Banking Crisis Fears, But For Now, Bank’s Collapse Is Just A Cautionary Tale

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The abrupt implosion of Silicon Valley Bank (SVB) on Friday—the second-largest U.S. bank failure in history—is a warning to financial companies against placing all your bets on one market-sensitive horse, rather than an indication of a broader systemic problem among banks.

The Santa Clara, California–based bank and its parent, SVB Financial Group, focused too heavily on crypto and tech startups as well as bond investments sensitive to interest rate hikes. That left the entire company exposed and, ultimately, drained of both capital and banking customers.

The Federal Deposit Insurance Corp. (FDIC), which insures bank deposits, was forced to step in and take over SVB’s $209 billion in assets and $175.4 billion in deposits on Friday morning. The timing was atypical, since the FDIC’s preferred strategy is to quietly announce bank failures on Friday nights, after business hours are over and the bank’s branches are closed.

The FDIC has not closed a bank in almost three years, since October 23, 2020.

The magnitude of SVB’s collapse was exceeded only by the 2008 failure of Washington Mutual, which had more than $300 billion in assets.

What SVB’s Collapse Means for the Financial System

SVB’s collapse doesn’t necessarily portend more bank failures to come, because the company did not operate like a typical bank.

Most of SVB’s investments were in the bond market and other securities that lose value when interest rates increase, as was the case last year as the Federal Reserve began hiking rates. The bank also focused mostly on tech startups and venture capital firms, which began drawing down on their deposits at SVB as tech stocks were getting hit. SVB realized more losses when it tried selling its securities, which had lost value due to high interest rates, and it ultimately wound up in a sudden liquidity crisis.

The end result was that SVB was exposed to both interest rate risk with its securities and market volatility in the crypto and tech spaces. Traditional banks in the U.S. typically have more diversified portfolios nowadays, after regulators imposed new rules—along with increased capital reserves—following the 2008 financial crisis.

On March 3, another peer, Silvergate Capital Corp., said that it was closing its Silvergate Exchange Network cryptocurrency trading platform; this week, it announced the liquidation of its  bank. Silvergate’s woes only fed into the market panic, just as SVB was announcing a capital raise in an attempt to cover losses from bond sales.

All of these actions continued to concern depositors, who abandoned SVB this week. The FDIC took over as the company was trying to raise capital, intervening earlier than usual in an attempt to contain the damage. More broadly, larger bank stocks also took a hit this week.

While atypical, SVB’s fall is certainly a cautionary tale, especially to financial mega-institutions known as global systemically important banks (G-SIBs), which have the resources to dabble in bigger, riskier investments that could impact the markets and economy. But industry experts also warn not to interpret SVB’s failure as an indication that traditional U.S. banks face the same fate.

“SVB’s balance sheet looks nothing like most U.S. banks ergo this is contagion risk due to reputation—dangerous as hell—but … early warning of hidden risk at GSIBs, most other banks,” tweeted Karen Petrou, managing partner at Federal Financial Analytics, on March 10 following news of the bank’s failure.

Most analysts shared a similar perspective, with CFRA Research maintaining its “neutral outlook” on diversified U.S. banks.

“We do not see the Silvergate (SI) and SVB Group (SIVB) meltdown as a fundamental or liquidity risk for the large banks on unrealized long-term bond maturity losses (U.S. Treasuries and mortgage-backed securities),” said Kenneth Leon, research director at CFRA, in an email on March 10. “Large bank deposits have a diversified customer base (especially low-cost consumer deposits) … SIVB had concentration risk to deposits in the technology and venture capital industry.”

What SVB’s Collapse Means For Consumers

Unless you were a depositor or investor at SVB, this bank failure is unlikely to impact you. The FDIC formed a Deposit Insurance National Bank of Santa Clara (DINB) to assume SVB’s deposits and give SVB customers access to their funds beginning March 13.

While the FDIC insures depositors up to the legal limit of $250,000, the regulator said “the amount of deposits in excess of the insurance limits was undetermined” at the time it closed the bank.

It’s unclear exactly how many customers will be directly affected by SVB’s closure. But the importance of diversification rings as true for consumers as for banks. This includes putting your funds in more than one bank if need be, so as not to exceed the $250,000 insurance limit at any one institution.