The Silicon Valley Bank has gone bankrupt. We know the following:
On Friday, regulators shut down one of the most important banks in Silicon Valley. This was the second-largest bank failure in U.S. history and the largest since the Great Recession.
When Silicon Valley Bank stopped trading its falling shares earlier in the day, depositors rushed to withdraw their funds. SVB's failure shocked the industry as one of the primary depositories for venture-backed investments made by start-ups. The tech companies' layoffs and turmoil are exacerbated by rising interest rates and signs of broader financial distress.
When did a bank last fizzle?
Santa Clara, California, is home to SVB, a publicly traded bank in the heart of Silicon Valley. It is insured by the federal government, which means that the government will reimburse it for any unpaid deposits. SVB works with "nearly half" of the venture-backed start-ups in the United States, according to its website, and its clients include 44% of the venture-backed tech and health care companies that went public, such as Pinterest and ZipRecruiter.
Silicon Valley Bank's total assets stood at approximately $209 billion at the end of December, making it the second-largest failure of a federally insured bank in U.S. history, after Washington Mutual's 2008 collapse during the financial crisis.
What took place with the bank?
Bloomberg News reported that SVB held a significant amount of Treasury and other government bonds, or more than half of its assets. These bonds lost value as interest rates increased, necessitating the bank's recoupment of losses.
After the bank announced in a filing the day before that it had sold $21 billion in assets and planned to sell some of its stock to raise money, SVB shares plunged 60% on Thursday. Startups were encouraged to withdraw their funds after tech investors and company founders became alarmed by the disclosure.
However, others warned that a bank run could harm the numerous businesses that do business with SVB and called for calm.
SVB stock trading was halted as a result of the sharp decline in shares. The bank was then closed by regulators.
How will this affect the US economy?
On Thursday and Friday, banking stocks were impacted more broadly by SVB concerns. On Friday afternoon, the stock of First Republic Bank, which serves a number of tech companies in California, was down around 22%. On Friday afternoon, Bank of America shares were down about 1%, while Morgan Stanley shares were down more than 2%.
Increases in interest rates have a particular impact on banks. The Federal Reserve officials have indicated that they will continue to tighten policy further to control inflation and keep prices under control, but their hawkish stance has raised concerns of a recession. Friday's report from the United States government showed that the labor market added 311,000 jobs in February, demonstrating its resilience in the face of rising interest rates despite the Fed's campaign to tighten.
When was the most recent failure of a bank?
Silvergate Bank, which did business with the now-defunct cryptocurrency exchange FTX, made the announcement earlier this month that it would be liquidated while regulators looked into its interactions with FTX. There were no disappointments in 2021 and 2022, while four banks flopped in 2020, as per the Government Store Protection Enterprise.
Compared to closures during previous downturns, those figures pale. Bank failures increased after the Great Recession, reaching 140 in 2009, 157 in 2010 and 92 in 2011. The FDIC reports that there were 561 failures all together between 2001 and 2022.
What is a run on a bank?
All a bank run happens while banking clients unexpectedly attempt to pull out their cash at the same time, making the bank lose its cash — and maybe leaving it unfit to pay a few clients. The Federal Deposit Insurance Corporation (FDIC), which insures bank deposits, typically covers them up to $250,000. Banks that are protected by the FDIC are dependent upon government oversight.
Comments