The recent collapse of Silicon Valley Bank (SVB) and Signature Bank have caused concern among consumers. The reasons for the collapses are somewhat isolated but raises the question if we should be concerned about a bigger financial problem arising, as happened in the 2008 crisis. Let’s take a look at what happened and what it means.
💡 Fun Facts…
| 1) The largest bank failure was Washington Mutual in 2008 ($300 billion assets under management) |
| 2) The first bank failure was in the late 1700s |
| 3) 140 banks failed in 2009 — the most in US history |
SVB started in 1983 and is based in Santa Clara, California. Their key clientele is technology companies, particularly startups. The bank has had financial difficulties and an increase in bad loans. On March 10, 2023 the bank was taken control by the U.S. Government. Signature Bank, based in New York City, is a full-service commercial bank that serves businesses and consumers. The bank has also been struggling with financial difficulties, with mounting losses and a decline in deposits. On March 13, 2023 the federal government announced it was taking control of the bank. In both cases, the government assured depositors that they would have access to their FDIC insured accounts, although it’s uncertain what will happen to deposits over the $250,000 insurance limit.
Why did these two banks collapse? There are several factors that contributed to their financial difficulties. SVB had a large investment in government bonds, which lost value in the face of rising interest rates, causing their assets to decline. Simultaneously, there was a “run” on the bank’s deposits, which is when a large number of clients withdraw money in a short period of time. This forced the bank to sell bonds at a loss. They tried to raise money through outside investors, but were unable to, so the government seized control. It is the second largest bank failure in U.S. history. Similar to SVB, Signature Bank had a big reliance on tech related companies, in this case, cryptocurrency. The recent decline in the crypto market caused a similar run on the bank’s deposits, as customers looked to get cash.
Should people be concerned about the collapse of these banks? Fears of triggering a financial crisis like in 2008 are not supported. These two banks had unique clientele and were overly reliant on one industry. Most other banks are much more diversified across industries. Recent “stress tests” of the major financial institutions revealed that they would survive a recession and increase in unemployment. While the collapse of SVB will likely have an impact on the technology sector, particularly on the west coast, it doesn’t foretell a broader financial crisis.
Regulators are monitoring the situations very carefully and there were new banking requirements put in place after the Great Recession to prevent another crisis. The Dodd-Frank Act was passed in 2010, and is a major financial regulation which was designed to provide more financial stability to the industry. A key objective of the Dodd-Frank Act is increased transparency and accountability among financial institutions. The law requires financial institutions to disclose more information about their operations, including their risk management practices and executive compensation. Another key provision of the Dodd-Frank Act is the Volcker Rule, which limits their ability to invest in risky vehicles and reduces the main causes of the earlier financial collapse. There were also international financial regulations that were agreed upon by the leading economic countries of the world.
In short, the recent bank collapses are believed to be isolated incidents, due to their specific types of clients, and it is not expected that any major financial institutions will have challenges or fail.
OPINION
While hearing about bank failures can be scary, in this case, there’s not a real reason to be alarmed. Since these failures in early 2023, there haven’t been any others. These two seem to be isolated cases due to unusual circumstances. Thanks to intervention by the government and financial institutions, the bank failures didn’t have a broader impact on the overall financial system, as many people feared.
