The closures of Silicon Valley Bank (SVB) and Signature Bank sent shockwaves through the banking industry and were met with swift response by both the government and stock market. There are steps banks can take to protect their customers and institution. We summarize these recent developments step by step and analyze the potential further impact to other banks and their customers.
Proactive Insurance Solutions
It is vitally important that banks are properly insured against potential withdrawals, as well as for any upcoming increase in regulatory actions. There may also be an increase in shareholder and private actions.
To the former, there are several additional platforms and insurance solutions that can be accessed by banks to insure deposits over $250,000.
To the latter, banks should ensure they have appropriate retentions, limits, and coverage terms for their directors and officers and bankers professional liability insurance programs. Partnering with a sophisticated broker who understands the unique regulatory and litigation risks to regional and community banks is paramount.
The Perfect Storm: Why SVB Fell
SVB, based in Santa Clara, California, was closely tied to venture capital and the tech industry. It worked with over 2,500 venture capital firms and received a massive influx of deposits from tech startups over a relatively short period of time. Nearly half of US venture-backed technology and life sciences companies and 44% of US venture-backed technology and healthcare IPOs banked with SVB. SVB saw rapid growth, with its asset base rising from $49 billion at the end of 2020 to $209 billion at the end of 2022. SVB was the 16th largest bank in the country.
Instead of holding the deposits as cash, the majority of deposits were used by SVB to purchase long-term debt, such as Treasury bonds and mortgage bonds. This seemed a prudent decision then, as these bonds could provide a safe and steady return since interest rates were low at the time. Bonds also meet Tier 1 requirements of the federal regulators in terms of bank liquidity.
However, the Federal Reserve began raising interest rates in the spring of 2022 in an attempt to quell rising inflation. Rates went up, and these bonds lost their value as higher interest rate instruments became more available. The value of SVB’s bonds decreased and SVB faced a liquidity crisis.
The rise in interest rates and decrease in SVB’s bond values also coincided with a cooling of tech startup investment, some of whom began withdrawing their deposits. This perfect storm forced SVB to sell its investments at a loss to cover the departing deposits.
Timeline of Events
The bank announced that it was taking strategic action to strengthen its financial position. This included selling its available-for-sale securities portfolio for a $1.8 billion loss and commencing an underwritten public offering. In response that same day, Moody’s downgraded its financial rating, and the ratings outlook was changed from stable to negative.
SVB’s stock price began to decline. Customers began to withdraw their deposits and, sensing a potential liquidity crunch, tried to withdraw $42 billion by day’s end. Some cite SVB’s ties to the technology sector and rise in social media to the rapid bank run as tech companies quickly took to - social media regarding their concerns about SVB and eventually their inability to withdraw their deposits. By close of business Thursday, SVB had a negative cash balance of almost $1 billion. SVB had $175.4 billion in deposits, of which 89% were above the FDIC’s $250,000 insured limit. That left approximately $156 billion in customer deposits uninsured at the time of closing.
SVB was closed by California’s financial institutions regulator, the Department of Financial Protection and Innovation, and placed into receivership with the FDIC. This was the second largest bank failure ever, behind only the failure of Washington Mutual in 2008. Deposits were frozen on Friday, and the FDIC retained SVB’s assets.
On Sunday, federal regulators announced they had also closed Signature Bank, another large regional institution that had $110 billion in total assets and $82.6 billion in deposits at the end of 2022. Signature Bank was one of the few traditional financial institutions working closely with crypto companies. For example, Signature Bank ran Signet, a digital payment network, which allowed crypto clients to make payments at any time.
Bank stocks, especially regional banks, were hard hit on Monday as banks rushed to reassure their depositors and shareholders that they were positioned differently than SVB and Signature Bank. A series of temporary trading halts were applied to over a dozen regional banks.
SVB Financial Group, its CEO and CFO were sued in a proposed shareholder class action in federal court. The complaint alleges violations of federal securities laws, including violations of Sections 10(b) and 20(a) of the 1934 Act. The complaint alleges that the defendants made materially false and/or misleading statements as they misrepresented and failed to disclose the adverse facts pertaining to SVB business.
The federal government was quick to respond over the weekend and early Monday in an attempt to prevent further bank runs and closings, as well as to reassure the stock market.
In an effort to assuage concerns about uninsured funds over $250,000, the FDIC announced that all Silicon Valley Bank and Signature Bank deposits will be fully returned to the depositor, regardless of size and whether they were insured or uninsured by the FDIC. In announcing these measures, the FDIC stated “[t]hese actions will reduce stress across the financial system, support financial stability and minimize any impact on businesses, households, taxpayers and the broader economy.”1
“Bridge” banks were created to facilitate customer access to SVB and Signature Bank deposits. These banks were established as full-service banks to absorb the banks’ deposits and assets. All SVB insured and uninsured funds were transferred to the newly created, full-service FDIC-operated bank, Silicon Valley Bank, N.A. Similarly, Signature Bridge Bank, N.A. was created, and the FDIC transferred all the deposits and most of the assets of Signature Bank to the new bridge bank.
The Federal Reserve also announced it was setting up an emergency lending program, banked by $25 billion cash from the Treasury, to provide a backstop to the broader banking industry. The hope is that the other large regional banks in Signature and SVB’s peer group can avoid a potential run on their banks. The additional federal funding will be made available through the creation of a new Bank Term Funding Program, offering loans of up to one year in length to banks, savings associations, credit unions and other eligible depository institutions pledging US Treasuries, agency debt, mortgage-backed securities and other qualifying assets as collateral. Crucially, these assets will be valued at par.
Is This the End or Just the Beginning of Another Banking Crisis?
The quick actions by the government come in an effort to prevent another 2008 banking crisis, which saw over five hundred institutions close by 2015. The critical difference between the current environment when compared to 2008 is the root cause behind the recent bank closures. In 2008, the real estate market collapse was the driving force behind the rapid deterioration of the banking system. Since most banks had heavy concentrations in a variety of real estate lending, it was near impossible to avoid at least some of the impact of a rapid, systemic collapse of the real estate market.
In comparison, in 2023, the cause of the overnight implosion of a smaller (but significant) group of banks can be traced to two main triggers: heavy concentrations in tech/venture capital funding and crypto lending. Combined with skyrocketing interest rates over a very short period of time, SVB quickly became underwater on their treasury bond holdings.
SVB, of course, isn’t the only bank in this bond position.
In a statement by President Biden on Monday, he said that “the American people and American businesses can have confidence that their bank deposits will be there when they need them.” However, he also warned that he would hold those responsible for the situation accountable and hinted at further regulation, stating:
I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again.
Banks have an opportunity to learn from the difficult situation faced by SVB and Signature Bank, and take this as their cue to be proactive in acquiring insurance coverage against withdrawals and financial protection against liability to their banks and their directors and officers. We anticipate that insurance premium pricing may increase and coverage terms will become more restrictive. Banks should ensure they have appropriate insurance limits and retentions and work with insurance specialists who will push for broader coverage and can access the insurance markets directly.
No one can see the future, but careful planning can often prevent the worst-case scenario in a difficult environment. NFP’s financial institutions experts can help.
Meet the Authors
Managing Director, Financial Institutions Group
Justin CoreyVisit Our Financial Institutions Page
SVP, Financial Institutions Group