How to explain the Silicon Valley Bank failure without needlessly creating panic

Plus, why the bank is important beyond its customers, how to explain the FDIC, a promising breakthrough in bone cancer treatment, and more.

The Silicon Valley Bank headquarters and branch in Santa Clara, Calif. 

By: Al Tompkins
March 13, 2023

Federal officials spent the weekend trying to calm fears around the sudden closure on Friday of Silicon Valley Bank that could cause another round of destabilization. The Federal Deposit Insurance Corp. announced emergency measures that would protect bank customers big and small as another bank, the third in a week, closed over the weekend.

On Sunday, New York regulators shut down Signature Bank, best known as a bank that law firms used to park escrow funds for clients. The New York Times said the bank was hit hard Friday by customers pulling funds. Bank officials told the Times they thought things had settled down on Sunday, but regulators moved in.

Signature also was a big player in the cryptocurrency world, second only to Silvergate, which also announced it would liquidate last week.

In an attempt to calm jitters and prevent a panicked rush to withdraw money, Treasury Secretary Janet Yellen announced late Sunday that the FDIC would back all deposits, whether they are covered under the $250,000 cap or not. And, the secretary added, taxpayers would not pay the cost. Instead, the cost would be paid by banks through “special assessments.” The Treasury Department and the FDIC posted:

After receiving a recommendation from the boards of the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, Treasury Secretary Yellen, after consultation with the President, approved actions to enable the FDIC to complete its resolutions of Silicon Valley Bank and Signature Bank in a manner that fully protects all depositors, both insured and uninsured. These actions will reduce stress across the financial system, support financial stability and minimize any impact on businesses, households, taxpayers, and the broader economy.

Yellen said Sunday that the government would not bail out Silicon Valley Bank. Yellen told CBS News, “Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out, and we’re certainly not looking.”

Today will also provide insight into whether the problems at Silicon Valley Bank are wider than that fairly small institution, which ranked 16th in size in the U.S. banking industry. Silicon Valley also had international branches that could scare depositors outside of the U.S., including in China, Denmark, Germany and India.

On Sunday, Shalanda Young, the director of the White House Office of Management and Budget, told CNN that the banking system in the U.S. is healthy and more resilient now than in the 2008 banking crisis. She said, “It has a better foundation than before the (2008) financial crisis. That’s largely due to the reforms put in place.”

To give you an idea of what happened last week, Axios calculates, “Silicon Valley Bank’s customers withdrew $42 billion from their accounts on Thursday. That’s $4.2 billion an hour, or more than $1 million per second for ten hours straight.”

Silicon Valley Bank is and was especially important to tech sector startups. If those businesses fear they could lose their assets, they could continue the bank run and withdraw their accounts and cause more problems.

This is the first U.S. bank failure since 2020. In some ways, it can trace its problems to the fact that Silicon Valley Bank got much of its business from the tech sector, which has been reeling in recent months. But as small as Silicon Valley Bank is compared to giants like Bank of America, Citigroup and JP Morgan Chase, all of those stocks took a beating on the news of the Silicon Valley Bank failure.

Unlike the 2008 banking crisis, which was mainly the result of risky loans made to people who bought overpriced houses, it appears that this banking failure (at least at Silicon Valley Bank) is linked to rising interest rates. The Federal Reserve has been raising interest rates since early 2022 and plans to send them higher. People saw that they could earn risk-free income by buying treasuries, which had higher interest rates thanks to the Federal Reserve, and the bank had to find a way to raise the cash to cover those withdrawals. The quickest way to do that is to sell portions of a bank’s loan portfolio. When you liquidate quickly, you take a loss.

Business Insider’s Matthew Fox reports:

The bank’s collapse was a byproduct of the Federal Reserve’s hiking of interest rates by 1,700% in less than a year. Once risk-free Treasurys started generating more attractive returns (5%) than what SVB was offering, people started withdrawing their money, and the bank needed a quick way to pay them.

(The United States Treasury offers five types of Treasury marketable securities: Treasury Bills, Treasury Notes, Treasury Bonds, Treasury Inflation-Protected Securities and Floating Rate Notes.)

The bank had to sell its loan portfolio at a massive loss. Fox does a terrific job explaining how the collapse unfolded:

Back in 2020 and 2021, tech startups were buzzing with sky-high valuations, stock prices were soaring to record highs on an almost weekly basis, and everyone was flush with cash thanks to trillions of dollars of stimulus from the government.

In this environment, Silicon Valley Bank, which had become the go-to bank for start-ups, thrived. Its deposits more than tripled from $62 billion at the end of 2019 to $189 billion at the end of 2021. After receiving more than $120 billion in deposits in a relatively short period of time, SVB had to put that money to work, and it’s loan book wasn’t big enough to absorb the massive influx in cash.

So, SVB did a normal thing for a bank — just under terms that ended up working against it. It purchased US Treasury bonds and mortgage backed securities. Fast forward to March 16, 2022 when the Fed embarked on its first interest rate hike. Since then, interest rates have soared from 0.25% to 4.50% today.

Suddenly, SVB’s portfolio of long-term bonds, which yielded an average of just 1.6%, were a lot less attractive than a 2-year US Treasury Note that offered nearly triple that yield. Bond prices plunged, creating billions of dollars in paper losses for SVB.

Ongoing pressure on tech valuations and a closed IPO market led to falling deposits at the bank. That spurred SVB to sell $21 billion of bonds at a loss of $1.8 billion, all in an effort to shore up its liquidity but which essentially led to a run on the bank.
Why is Silicon Valley Bank important beyond its customers?

The New York Times explains that this bank has been a lifeblood for the tech industry and some of the big players in it:

The fall of Silicon Valley Bank was especially troubling because it was the self-described “financial partner of the innovation economy.” The bank, founded in 1983 and based in Santa Clara, Calif., was deeply entangled in the tech ecosystem, providing banking services to nearly half of all venture-backed technology and life-science companies in the United States, according to its website.

Silicon Valley Bank was also a bank to more than 2,500 venture capital firms, including Lightspeed, Bain Capital and Insight Partners. It managed the personal wealth of many tech executives and was a stalwart sponsor of Silicon Valley tech conferences, parties, dinners and media outlets.

The bank was a “systemically important financial institution” whose services were “immensely enabling for start-ups,” said Matt Ocko, an investor at the venture capital firm DCVC.
Explain the FDIC

In times of uncertainty, it is a great public service for journalists to explain the basics of the financial system and the safeguards in place to protect people’s money.

The Federal Deposit Insurance Corp. traces its history to the Banking Act of 1933, after the Great Depression caused a panicked run on banks. The FDIC says, since 1934, “no depositor has lost a single penny of insured funds due to bank failure.” Read what President Franklin Delano Roosevelt said back in 1933 when the panic began. It was a chilling address and nothing like a small bank in California closing — as long as it remains just one banking company.

The FDIC does not protect 401(k) retirement funds that are not invested in bank products. For instance, the FDIC would not protect losses in stocks, bonds, mutual funds, annuities, insurance products and crypto assets. If a brokerage that managed your funds went out of business, you might get help from the Securities Investor Protection Corporation, but when you invest in stocks and such, you could lose (and gain) money. SIPC explains its function this way:

If a firm closes, SIPC protects the securities and cash in a customer’s brokerage account up to $500,000. The $500,000 protection includes up to $250,000 protection for cash in the account.

SIPC protects customers if:The brokerage firm is a SIPC member.
The customer has securities at the brokerage firm.
The customer has cash at the brokerage firm on deposit in connection with the purchase or sale of a security. SIPC protection is only available if the brokerage firm fails and SIPC steps in.

SIPC does NOT protect: Investments if the firm is not a SIPC member.
Market loss.

Promises of investment performance.
Commodities or futures contracts except under certain conditions.

SIPC does not protect market losses because market losses are a normal part of the ups and downs of the risk-oriented world of investing. Instead, in a liquidation, SIPC replaces the missing stock and other securities when it is possible to do so.

The best advice is to be sure your broker is SIPC insured. Here is a list of 3,500 insured members. One of the most infamous SIPC cases involved Bernie Madoff. That case so far has distributed more than $14 billion.

When you put money in an FDIC-insured bank product, it is protected up to $250,000. You could, of course, have multiple accounts, including a savings account, a CD account and a trust. Each is insured up to $250,000. A husband and wife could each have accounts.

Biden Reassures Depositors Of SVB, Signature Bank After Third Failure In A Week Meanwhile, Silicon Valley Bank's British subsidiary was taken over by HSBC in BoE and government facilitated transaction 

By - Mohammed Kudrati | 13 Mar 2023 

US President Joe Biden assured depositors of full access to the entirety of their funds as New York-based Signature Bank was taken over by regulators in a late-night manoeuvre on March 12. The bank had $114 billion in assets and is the third largest US bank failure. This marks the third US bank to fail in a week in what poses to be major challenge to US regulators since the 2008 financial crisis. Another crypto-linked bank, Silvergate Bank, was liquidated by its parent, Silvergate Capital. 

The bank popularly held an account of the crypto-exchange FTX, which went through troubles last year. Its founder and CEO Sam Bankman-Fried who was arrested on charges on fraud and is currently out on bail. Last Friday, Silicon Valley Bank failed and was taken over by Californian regulators. If Signature Bank was the third largest US bank failure by assets, Silicon Valley Bank was the second. It had assets worth $206 billion and was stable till last week. But it was a victim of a run on the bank and had to meet $42 billion in a day due to its close proximity to the tech sector and its growing need for cash upfront. The New York State Department of Financial Services took over the Signature Bank and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver, like California's regulator did with SVB. The FDIC is the federal deposit insurer, that guarantees bank deposits up to $250,000.

 Further, the assets of the bank have been made marketable by referring them to a new holding entity and full-service bank - Signature Bridge Bank N.A. - to make it more marketable. Such secondary banks are called 'bridge banks' to help sell off the assets of a beleaguered bank to help it reach a meaningful resolution. "A bridge bank is a chartered national bank that operates under a board appointed by the FDIC. It assumes the deposits and certain other liabilities and purchases certain assets of a failed bank. The bridge bank structure is designed to “bridge” the gap between the failure of a bank and the time when the FDIC can stabilize the institution and implement an orderly resolution," the FDIC says. Further, this comes at a time when economic projections are seesawing as to whether it will face a recession later this year. 

Contagion spreads abroad Ripples of a banking system fallout can be seen in Europe. SVB's British arm was purchased today by HSBC for £1 in a transaction brokered by the Bank of England and British government. The measures were announced by Chancellor of the Exchequer, Jeremy Hunt. The powers to facilitate the transaction was derived from regulation to strengthen the financial system after the financial system. The solution resembles one that the US government is currently mulling - a takeover of the bank by a financial institution that is larger. "Today the government and the Bank of England have facilitated a private sale of Silicon Valley Bank UK; this ensures customer deposits are protected and can bank as normal, with no taxpayer support. I am pleased we have reached a resolution in such short order", Hunt is quoted as saying. 

In Germany, the banking regulator BaFin imposed an operational moratorium on SVB's local branch. The German arm of the bank had assets worth $341 million, with the regulators said that the situation posed no "threat to financial stability", Reuters reported. Germany is Europe's largest economy. India's Minister of State Rajeev Chandrashekhar has reportedly met with founders of affected startups over this issue. The UK's FTSE 100 index is down sharply at 1.92%, trading at 7,598 points while Germany's DAX has tumbled 2.68%, trading at 15,024 points. Germany's consolidated bank index has fallen nearly 9.53% on the Frankfurt Stock Exchange. Indian stocks ended lower with NIFTY50, the benchmark of the National Stock Exchange, 1.5% lower at 17,154 points. BANKNIFTY, the benchmark bank index on the NSE, has fallen 2.27% at 39,564 points.

HSBC UK acquires Silicon Valley Bank UK for £1, saving hundreds of innovative UK companies

RUSSELL KIDSON
Mar 13, 2023

HSBC UK has announced its acquisition of Silicon Valley Bank UK for a nominal amount of £1. The transaction followed a weekend of intense negotiations among the U.K. government, regulators, and various potential buyers after the U.K. subsidiary of the troubled U.S. entity entered insolvency procedures on Friday.

This acquisition will provide significant relief to the U.K. technology sector, which was particularly vulnerable to the collapse of both SVB and its U.K. arm. The rapid completion of the deal will be perceived as a sign of the government's endorsement of the technology industry and its trust in the financial system as a whole.

According to a statement released by HSBC, the transaction has been completed immediately, and the acquisition will be financed using existing resources. The bank further stated:

‘As at 10 March 2023, SVB UK had loans of around £5.5 billion and deposits of around £6.7 billion. For the financial year ending 31 December 2022, SVB UK recorded a profit before tax of £88 million. SVB UK’s tangible equity is expected to be around £1.4 billion. Final calculation of the gain arising from the acquisition will be provided in due course.’

The Bank of England has assured the safety of all depositors' funds with SVB UK, as the acquisition guarantees the continuity of banking services. As a result, SVB UK will not be subjected to insolvency proceedings.

U.K. Chancellor Jeremy Hunt confirmed that the government, in collaboration with the Bank of England, has facilitated a private sale of Silicon Valley Bank UK to HSBC. He further stated that depositors' funds will be protected without the need for any financial assistance from taxpayers.

The Bank of England has confirmed that Silicon Valley Bank UK's business operations will continue as usual under the ownership of HSBC. All services will remain unchanged, and customers should not anticipate any disruptions to their banking experience. Customers are encouraged to contact SVB UK through the regular communication channels, and loan repayments should continue to be made to SVB UK as usual. SVB UK's employees will remain employed by the bank, and the institution will retain its authorization from the PRA/FCA.

The Bank's statement also supersedes its previous declaration on March 10 that, in the absence of any significant additional information, it intended to seek a court order to place SVBUK into a Bank Insolvency Procedure. The emergence of a credible purchaser for SVBUK has led the Bank to exercise its resolution powers for stabilizing failing banks, rendering the previous statement moot.

The Bank of England also confirmed that no other U.K. banks will be materially affected by these actions or the resolution of SVBUK's U.S. parent bank, and that the wider U.K. banking system remains secure, robust, and adequately capitalized.

Noel Quinn, the CEO of HSBC Group, has expressed his enthusiasm for the acquisition of Silicon Valley Bank UK and extended a warm welcome to its customers in a statement. He affirmed that the deal aligns with the bank's strategic vision for the U.K. market and will reinforce its commercial banking capabilities, particularly in serving innovative and rapidly growing firms, including those in the technology and life science sectors, both in the U.K. and internationally.

Quinn further assured SVB UK customers that they could continue to bank with the same level of convenience and safety they are accustomed to, with the added assurance that their deposits are backed by the strength and security of HSBC. The CEO also expressed his eagerness to collaborate with SVB UK colleagues and strengthen the bank's position in the U.K. financial sector.

Dom Hallas, the Executive Director of Coadec, a non-profit organization that advocates for the interests of tech startups, has lauded the efforts of the U.K. government in facilitating the acquisition. He acknowledged the significant role played by various government bodies, including HM Treasury and the civil servants who worked tirelessly to secure the deal. Hallas also highlighted the importance of the government's intervention in protecting hundreds of the U.K.'s most innovative companies.

The sale of SVB UK to HSBC has spared the U.K. from the need to provide system-wide support to safeguard depositors' funds, a measure that the U.S. Treasury was forced to introduce in similar circumstances. Additionally, the acquisition has reduced the likelihood of the so-called 'moral hazard' risk, which occurs when failed banks and depositors expect to be bailed out by the government.Advertisement