The New York Times – If there’s ever been a principle in banking, it’s this: Never run out of cash.
a Silicon Valley Bankthe financial institution of some of the biggest names in the world of technologythis is exactly on Friday, the tenth, becoming the largest Bank American bankruptcies since the 2008 financial crisis. The move put nearly $175 billion in customer deposits, including money from some of the biggest names in tech, under the control of the Federal Deposit Insurance Corporation (FDIC).
It was an extraordinary result, less than two days after the bank Wall Street and its account holders were shocked by emergency measures to raise funds and avoid collapseIn the face of withdrawal requests from clients and the sharp drop in the value of their investments. A person familiar with the negotiations said that, on Friday morning, the bank was working with advisors on a possible sale, and was forced to stop trading its shares on the stock exchange after a significant decline.
The FDIC, the institution responsible for guaranteeing US bank deposits, has created a new bank, the National Bank of Santa Clara, to hold SVB deposits and other assets. The regulator said in a press release that the new entity will start operating on Monday and that checks issued by the old bank will continue to be cleared.
But for customers whose deposits totaled more than $250,000, the news was grim. Customers with accounts over that amount — the maximum covered by the FDIC — will get certificates of their money, meaning they’ll be among the first to get paid — albeit possibly partially — with a refund while the insurance company keeps The Federal Reserve Bank (FDIC) of Silicon Valley is in bankruptcy.
But perhaps the most immediate concern for investors is the possibility that other banks will have problems of their own.
For example, shares in First Republic and Signature Bank in New York fell more than 20% in Friday trading. The larger banks were more insulated from the fallout. After falling Thursday, shares in JPMorgan, Wells Fargo and Citigroup are up today.
Janet Yellen, US Treasury Secretary
The decline in bank stocks does not necessarily mean that other banks are facing the same problem.
The Silicon Valley bank spiral accelerated incredibly quickly this week, but its problems have been brewing for more than a year. Founded in 1983, and headquartered in Santa Clara, California, the bank has been a financial benchmark for startups and their executives.
Although Silicon Valley Bank advertises itself as a “partner in the innovation economy,” it has been shaken by outright outdated decisions. To compete with the bigger names, it has long boasted more flexible lending standards for startups and offered to pay higher interest rates on deposits than its larger rivals.
Flush with cash from successful startups, the bank bought large amounts of bonds more than a year ago, before the Federal Reserve (Federal Reserve Bank, the US central bank) started raising interest rates. Like its peers, Silicon Valley Bank kept only a fraction of the deposits in its coffers and invested the rest in the hope of a return.
In particular, the bank placed its clients’ money in long-term US Treasury bonds and mortgage bonds, which, despite low interest rates, promised modest and stable returns.
This works fine for years. The bank’s deposits doubled from $49 billion in 2018 to $102 billion at the end of 2020. A year later, in 2021, its coffers totaled $189.2 billion as startups and tech companies made big profits during the pandemic.
When the Federal Reserve started raising interest rates last year, those holdings became less attractive because new government bonds paid more interest. It may not matter as long as the bank’s customers don’t ask for their money back.
But at the same time that interest rates have risen, the funding environment for startups has dried up, putting pressure on the bank’s customers – who have begun withdrawing their money. To pay these ransom demands, the Silicon Valley bank had to sell some of its investments at exactly the wrong time. In a surprise disclosure on Wednesday, the bank admitted it lost nearly $2 billion when it had to sell some of its holdings.
The turmoil has drawn uncomfortable parallels to the 2008 financial crisis – the last time a bank of this magnitude failed. Then, as now, what appeared to be a booming economy started a sudden cold snap, putting pressure on the banks.
“It’s a classic Jimmy Stewart problem,” said Sheila Beer, the former FDIC president, referring to the actor who played a banker trying to avoid a bank run in It’s a Wonderful Life. “If everyone starts withdrawing money at once, the bank will have to start selling some of its assets to get the money back to depositors.”
A spokeswoman for the bank did not respond to a request for comment. Representatives for the Federal Reserve and the FDIC declined to comment.
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