Silicon Valley Bank collapse: what you need to know

WASHINGTON (AP) — Two major banks focused on the technology industry have collapsed after a bank rungovernment agencies are taking emergency action to shut down the financial system, and President Joe Biden is assuring Americans that the money they have in banks is safe.

It’s all eerily reminiscent of the financial meltdown that began 15 years ago with the bursting of the housing bubble. Still, the initial pace seems even faster this time around.

For the past three days, the US seized the two financial institutions following a bank run on Silicon Valley Bank, based in Santa Clara, California. It was the largest bank failure since Washington Mutual collapsed in 2008.

More about the consequences of bank failures

How did we get here? And will the steps the government unveiled this weekend be enough?

Here are some questions and answers about what happened and why it matters:


Silicon Valley Bank had already been hit hard by a rough patch for technology companies the past few months and the Federal Reserve’s aggressive plan to raise interest rates to fight inflation exacerbated its problems.

The bank held billions of dollars in government bonds and other bonds, which is typical of most banks as they are considered safe investments. However, the value of previously issued bonds is beginning to decline as they pay lower interest rates than comparable bonds issued in the current higher interest rate environment.

That’s usually not a problem either, because bonds are considered long-term investments and banks don’t have to book declining values ​​until they are sold. Such bonds are not sold at a loss unless there is an emergency and the bank needs cash.

Silicon Valley, the bank that collapsed Friday, had an emergency. The clients were largely startups and other tech-focused companies that needed more money in the past year, so they started withdrawing their deposits. That forced the bank to sell some of its bonds at a hefty loss, and the pace of those withdrawals accelerated as word spread, effectively rendering Silicon Valley Bank insolvent..


The Federal Reserve, the US Treasury Department and the Federal Deposit Insurance Corporation have decided to guarantee all deposits at Silicon Valley Bank, as well as New York’s Signature Bank, which was seized on Sunday. Crucially, they agreed to guarantee all deposits, above and beyond the limit on insured deposits of $250,000.

Many of Silicon Valley’s early-stage technology clients and venture capitalists had well over $250,000 in the bank. As a result, as much as 90% of deposits in Silicon Valley were uninsured. Without the government’s decision to stop them all, many companies would have lost money needed to pay payroll, pay bills and keep the lights on.

The aim of the extended guarantees is to prevent bank runs – where customers rush to withdraw their money – by confirming the Fed’s promise to protect the deposits of companies and individuals and calm nerves after a harrowing few days .

Also late on Sunday, the Federal Reserve launched a broad emergency lending program designed to bolster confidence in the country’s financial system.

Banks are allowed to borrow money directly from the Fed to cover any customer drawdowns without being forced into the kind of money-losing bond sales that could jeopardize their financial stability. Such ‘fire sales’ are the cause of the collapse of Silicon Valley Bank.

If everything works as planned, the emergency loan program may not need to borrow a lot of money. On the contrary, it will reassure the public that the Fed will cover their deposits and that it is willing to borrow a lot of money to do so. There is no limit on the amount banks can borrow, other than their ability to provide collateral.


Unlike its more byzantine attempts to rescue the banking system during the 2007-2008 financial crisis, the Fed’s approach this time around is relatively straightforward. It has set up a new loan facility with the bureaucratic name of “Bank Term Funding Program”.

The program provides loans to banks, credit unions and other financial institutions for up to one year. The banks are being asked to post government bonds and other government-backed bonds as collateral.

The Fed is generous in its terms: it charges relatively low interest rates – only 0.1 percentage point higher than the market rate – and borrows at the nominal value of the bonds rather than the market value. Borrowing at the face value of bonds is an important provision that allows banks to borrow more money because the value of those bonds, at least on paper, has fallen as interest rates have risen.

At the end of last year, US banks held government bonds and other securities with about $620 billion in unrealized losses, the FDIC said. That means they would incur huge losses if they were forced to sell those securities to cover a stream of withdrawals.


Ironically, much of that $620 billion in unrealized losses can be linked to the Federal Reserve’s own interest rate policy over the past year..

In its fight to cool the economy and curb inflation, the Fed quickly raised its benchmark interest rate from near zero to around 4.6%. That has indirectly led to an increase in yields, or interest paid, on a range of government bonds, particularly two-year Treasuries, which had been trading above 5% until late last week.

When new bonds come out with higher interest rates, existing bonds with lower yields become worth much less when they have to be sold. Banks are not forced to record such losses on their books until they sell those assets, which Silicon Valley was forced to do.


They are very important. By law, the FDIC is required to follow the cheapest route when winding down a bank. In the case of Silicon Valley or Signature, that would have meant abiding by the rules on the books, meaning only the first $250,000 in depositors’ accounts would be covered.

To go beyond the $250,000 limit, it had to be decided that the failure of the two banks posed a “systemic risk”. The six-member board of the Fed came to that conclusion unanimously. The FDIC and the Treasury Secretary also agreed with the decision.


The US says that guaranteeing the deposits does not require taxpayer money. Instead, any losses from the FDIC’s insurance fund would be made up by charging an additional fee to banks.

Still, Krishna Guha, an analyst at the investment bank Evercore ISI, said political opponents will argue that the higher FDIC fees “will eventually fall on small banks and Main Street businesses.” In theory, this could cost consumers and businesses dearly in the long run.


Guha and other analysts say the government’s response is expansionary and should stabilize the banking system, though share prices for medium-sized banks, similar to Silicon Valley and Signature, plummeted Monday.

“We think the double-barreled bazooka should be enough to quell potential runs at other regional banks and restore relative stability in the coming days,” Guha wrote in a note to clients.

Paul Ashworth, an economist at Capital Economics, said the Fed’s credit program means banks should be able to “weather the storm.”

“These are strong moves,” he said.

Still, Ashworth also added a warning: “Rationally, this should be enough to prevent a contagion from spreading and taking down more banks… but contagion has always been more about irrational fear, so we want to stress that this is not guaranteed. will work.”

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