Banks are the important components of a financial system in any country, and the US is no exception. The recent collapse of the Silicon Valley Bank in the US has once again raised questions about the management and loopholes in regulatory mechanisms in the US. The Silicon Valley Bank (SBV) was the largest US lender to fail since the 2008 global financial crisis. SVB was the 16th largest bank in the United States (Bloomberg). The California-based Silicon Valley Bank was the largest bank by deposits to many startups and the biggest name in the tech sector, Silicon Valley. The reason behind SVB's collapse would be the shortage of cash. The issue with SVB is still being evaluated by experts. However, certain loopholes are identified in the bank's liability.
As per the report titled “Eye on the Market” by Michael Cembalest, SVB had higher reliance on institutional/VC funding rather than traditional retail deposits. Out of SIVB’s $173 billion of customer deposits at the end of 2022, $152 billion were reportedly uninsured (i.e., over the $250,000 FDIC insurance threshold), and only $4.8 billion were fully insured. The US Fed's policy rate has also played a key role in the downfall of SVB. During the pandemic, SVB and many other banks received more deposits than they could lend out to borrowers. Between Q4 2019 and Q1 2022, deposits at US banks rose by $5.4 trillion, and due to weak loan demand, only ~15% was lent out; the rest was invested in securities or kept as cash. To invest the excess deposits, SBV put the money in US treasury securities. The rapid rise in interest rates in 2022 and 2023 led the value of these securities to fall, and as a result, SVB suffered a loss of $1.8 billion when it sold some of its investments in securities. This has led to a growing number of depositors (who are early-stage technology companies baked by Venture Capitalist firms) to withdraw their money due to investment loss suffered, and as a result, SVB reported a deficiency of funds to pay their depositors. Moreover, SVB was not able to raise enough capital to offset the loss as its stocks began to fall. Obviously, the incident raised questions about the risk management measures adopted by the SVB and loopholes in regulatory mechanisms. Regulators are facing tough questions from congress about how Silicon Valley Bank and Signature Bank practically collapsed overnight. Bank stocks turned negative following the hearing before the Senate Banking Committee held on 28 Mar’23, favoring more stringent rules for banks with more than $100 billion in assets. The SPDR S&P Regional Banking ETF fell from a high of 44.26 points on 28 Mar'23 to 43.17 points today.
Now the most logical question is what corrective measures have been taken by the regulators to ensure depositors' money and fix loopholes in the banking system? On 13 Mar’23, the Federal Deposit Insurance Corporation (FDIC) transferred all deposits (both insured and uninsured) and substantially all assets of the former Silicon Valley Bank of Santa Clara, California, to a newly created, full-service FDIC-operated ‘bridge bank’ in an action designed to protect all depositors of Silicon Valley Bank. The FDIC created Silicon Valley Bridge Bank, National Association, following the closure of Silicon Valley Bank by the California Department of Financial Protection and Innovation. The FDIC has also transferred all Qualified Financial Contracts of the failed bank to the bridge bank. These actions will protect depositors and preserve the value of the assets and operations of Silicon Valley Bank, which may improve recoveries for creditors and the DIF. On 12 Mar’23, the Federal Reserve Board also stated that the Department of the Treasury has set aside $25 billion to offset any losses incurred under the Fed’s emergency lending facility. Separately, the Fed said it will provide financing by offering loans of up to a year to eligible banks and other financial institutions. The move is intended to prevent a wave of bank runs to maintain the stability of the banking system and the economy as a whole. (Source: FDIC, Federal Reserve)
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