Expert shares insight into SVB collapse

The U.S. banking system experienced a major upset when two banks, Silicon Valley Bank and Signature Bank, recently collapsed and were taken over by the FDIC.

It all began when SVB announced it needed to raise a significant amount of money during an investors call, which caused depositors to flock to the bank to withdraw billions of dollars in cash. This put the bank deep in the red, which, in turn, led to the government stepping in.

Following this series of events, Signature Bank landed in a crossfire as customers began withdrawing cash in droves.

Recently, First Citizens Bank stepped in to acquire the lion's share of SVB's assets from the FDIC.

There are many conflicting reports about why these banks fell apart and what it means for consumers in general. To gain insight into what happened and how consumers should react, ATM Marketplace reached out to Ann Kaplan, founder of iFinance.

Q. What were the primary reasons this collapse occurred?

A. The reason for the SVB closure is four-fold:

Regulation

Part of the reason for the SVB Bank closure is the change to the rules of the Dodd-Frank. After the aftermath of the great recession in 2008, the Dodd-Frank Act was put into place in 2010. In 2018 the federal government made a change that, given all the noise in politics at the time, went almost unnoticed. This rollback lessened scrutiny for banks at $50B in assets to $250B in assets. This meant that banks with under $250B in assets were less scrutinized than the larger banks with assets over $250B. That $250B benchmark created a line for banks to stay under and escape more stringent regulation.

Banks like Silicon Valley Bank could operate without the strict regulation and accountability imposed on its larger competitors, in particular where protective asset and liquidity ratios are imposed. This meant that Silicon Valley Bank, unlike banks with assets in excess of $250 billion, was not required to disclose how much it had in high quality liquid assets to help cover net cash outflows in a period of stress.

Decreasing value of U.S. treasury bonds

Silicon Valley Bank took on too many deposits, investing a small amount in cash and the balance in low interest, long-term debt like U.S. Treasury bonds and mortgage bonds. This type of investment is typically safe, but the value of those investments fell because Silicon Valley Bank paid lower interest rates than what a comparable bond would pay if issued in today's higher interest rate environment. When inflation hit, these bonds lost value amid the Federal Reserve's aggressive plan to increase rate hikes. It is important to point out that the rule what Silicon Valley Bank did not do, which is in violation of basic rules of banking, was diversify risk.

Cash need for non-profitable start-ups

Silicon Valley customers were largely startups and tech-centric companies that became needy of cash over the past year. As venture capital funds started turning away from non-profitable businesses (typical in the startup tech sector) the startups began to withdraw their deposits. As the demand for withdrawal increased, Silicon Valley Bank began to sell their own assets to meet the cash demand. This required SVB to sell their entire available-for-sale investment portfolio at a loss of $1.8B to the point where Silicon Valley Bank became insolvent. The next day, March 9, the financial downgrade caused the price of its holding company's publicly traded shares to decline.

Decline in stock price

The decline in the stock price caused panic. As many of the SVB customers were wealthy and businesses, they became concerned where the insured deposit cap (FDIC) was $250,000 and began to withdraw their cash, $42 billion in cash (25% of the banks total deposits) in a single day. By the end of the day the bank had a negative cash balance of $1 billion. The bank regulators had no choice but to seize the assets of the bank to protect what was remaining and the FDIC took over as a receiver.

Q. What does it mean for consumers?

A. The closure of the country's 16th largest bank, Silicon Valley Bank, has sent shivers through the financial sector, raising questions about other lending institutions concerning both consumers and businesses and the safety of their deposits. The other effect the closure has is on the stability of the market in general.

Those with deposits under $250,000 at Silicone Valley Bank were protected. The Treasury department and Federal Reserve Insurance Corporation issued a statement that they were taking steps to protect all depositors. They stated "no losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer." However, wealthy investors which could not withdraw their cash and investors are at risk.

Regardless of the direct impact, consumers in general, are concerned about the safety of their deposits, their bank and the U.S. banking system. Customers across the country are asking if they should withdraw their money? They want to know how they are affected. Most banking experts believe the financial crisis will pass, that investments and deposits are secure and that banks are safe. It is advised that if a customer has more than $250,000 in deposits, they may want to split their money into different banks.