Credit: Kyle Calzia
Banking is a confidence trick. A depositor puts money in the bank because they are confident they can take it out tomorrow. A dollar in the bank is worth just as much as a dollar bill in the depositor’s pocket. Someone can at any time show up to an ATM or bank teller and expect to receive their money. But the bank doesn’t just keep the money deposited in a safe deposit box and wait for it to be withdrawn; the bank uses this money to make loans or purchase bonds and keeps a small remainder for people who need cash. If every depositor asked for their money back tomorrow, the bank would not have it. However, every depositor is confident that if they ask for their money back tomorrow, the bank will have it. This universal belief that banks do have the money is what actually makes it true.
This also means the opposite is true; if depositors stop believing the bank has the money, it stops being true. If every person stopped believing in a bank, they would all rush to pull their money out, the bank would not have the money, and their belief would be retroactively justified. This is the so-called “bank run.” It is this lack of belief that not only led to the Silicon Valley Bank collapse, but also the collapse of both Signature Bank and similarly, Credit Suisse, all within weeks of each other.
This article seeks to analyze the three bank collapses for the sake of trying to understand what went wrong and how it could have been avoided.
Silicon Valley Bank
Silicon Valley Bank (SVB) was founded in 1983 with a focus on the needs of the emerging technology industry in Silicon Valley. SVB, with its superior knowledge of the startup world, was able to navigate the field with ease. They structured loans around the concept that startups lacked revenue and primarily had cash accrued from selling equity to venture capital firms. SVB was able to carve out a large role in the startup world and as of 2015, they served 65 percent of all U.S. startups. Much like other banks, the pandemic resulted in a massive increase in deposits for SVB. Between 2019 and the first quarter of 2022, SVB’s deposits tripled to $198 billion. This compares to industry growth of 37 percent. Around $128 billion of the deposits were noninterest-bearing with the rest of $70 billion accumulating a very small amount of interest.
SVB used these new deposits in two ways: (1) They protected their liquidity by investing in shorter-term AFS securities and (2) pursued high yield with longer-term HTM securities. SVB’s AFS portfolio increased from $13.8 billion at the end of 2019 to $27 billion in the first quarter of 2022. Their HTM portfolio grew from $13.8 billion to $98 billion in the same time period.
When interest rates increased, SVB’s unrealized losses began to climb. Their HTM portfolio’s unrealized losses grew in one year from zero to $15.9 billion. That’s a 17 percent loss on their $98 billion invested in HTM securities. These losses were so large that SVB was technically insolvent in September 2022 as their HTM losses absorbed their $11.3 billion in tangible equity.
However, as stated above, these losses are not necessarily recorded. So, although appearing on its face fatal, SVB was still very much alive at this point in time.
The question of what started the bank run to bring SVB to ruin is not one that can be answered with a single event. Sentiment regarding a bank plays a critical role in the comfortability of customers leaving their deposits untouched. The panic that creates a bank run does not even need to be founded in reality or based on fact – the panic just has to exist. Once a certain number of people begin to worry, the process becomes a self-fulfilling prophecy. The more people worry, the more people withdraw, and the less the bank can cover with its reserves causing others to worry about the insecurity of their money.
On March 8, 2023, two days before the run, SVB declared a $1.8 billion writedown on a $21 billion sale of nearly its entire AFS portfolio and announced a sale of $1.75 billion in common and preferred stock. This move is important not because of insolvency issues, but it changed the perception of the bank’s financial health. It is clear this move caused customers of the bank to worry about the security of their funds.
On March 9, 2023, Bloomberg reported Peter Thiel of Founders Fund advised his firm to move their money out of SVB. In writing on this issue, Matt Levine quipped that “nobody on Earth is more of a herd animal than Silicon Valley venture capitalists.” Because the circle venture capitalists and startups operate in is extremely small, when a firm like Founders Fund moves, the rest are quick to follow suit. There is no telling had Thiel not said anything the run would not have happened. We can be sure that his actions did nothing to stop the self-fulfilling prophecy of the SVB bank run.
Signature Bank
Silicon Valley Bank was not the only U.S. bank to collapse in March. Just two days later, the New York based financial institution, Signature Bank (Signature), collapses after a similar bank run. All eyes were on Signature collapse because it could spark panic and unrest throughout the banking sector.
Signature Bank was a FDIC-insured institution. The bank was most known for its high profile New York real estate clients, and especially famous in the entertainment sector being one of the main banks supporting major Broadway productions. Prior to the collapse, the bank was the 19th largest bank, only coming in a few spots lower than the SVB. It had over $110 billion in assets and over $88 billion in deposits.
So why did Signature Bank fail? Similar to SVB, in short, Signature collapsed due to the infamous bank run. However, Investopedia cites three possible factors to the bank’s March collapse: (1) concerns about its concentration in the crypto sector, (2) an abnormally large share of uninsured deposits, and (3) a possible liquidity risk.
The main factor for the collapse is most likely the large share of uninsured deposits, some of those coming from the cryptocurrency sector which the market collapsed in 2022. The instability caused by the FTX collapse, coupled with the large amount of deposits coming from the crypto sector, played a huge role in the third major bank collapse since 2008. But before the collapse could get any worse, U.S. regulators seized the bank in order to “protect depositors” and backed the bank with the help of the FDIC.
But the question remained, would the FDIC be able to help those customers with uninsured deposits? Well, the FDIC tried. It implemented a Bank Term Funding Program (BTFP), which “offered "loans to depository institutions for up to one year.” This allowed the new-FDIC regulated Signature Bridge Bank depositors to recover deposits over the $250,000 limit, which contained the panic throughout.
However, the instability, combined with the panic and lack of confidence throughout the banking system, made the perfect storm for another bank collapse, this time on the east coast. After the fall of Signature Bank, many pondered the banking system’s integrity.
Credit Suisse
Outside of the American banking system with similar issues, but with some variation to its problems, comes Credit Suisse. The Swiss bank was the second largest bank in Switzerland. Credit Suisse collapsed shortly after SVB’s and Signature Bank’s collapses. What led up to it was a string of scandals, administration reshuffling, and heavy monetary losses over the past few years. Credit Suisse was quickly acquired by Switzerland’s largest bank, UBS Group AG (UBS), after its downfall for 3.3 billion CHF (or $3.3 billion USD). The Swiss government, with its regulatory oversight, offered $108 billion to complete the transaction to ensure stabilization of their financial system.
Credit Suisse’s collapse was a bit different from SVB’s and Signature’s. First of all, the Swiss bank was enduring multiple scandals, huge losses, and restructuring. In 2020, the bank’s then-CEO, Tidjane Thiam, stepped down after a scandal. Later in 2022, Chairman Antonio Horta-Osorio also stepped down due to a scandal related to COVID-19 and certain protocols. Later that year, there was a rumor circulating that the bank was due for a possible or rather imminent financial failure, which led to customers pulling out $119 billion.
In 2023, the Swiss bank tried to stabilize its liquidity with the help from the Saudi National Bank, but it failed after the Saudi National Bank failed to help due to regulatory concerns. Thus, after the two previous US banks failed, the board of directors of the once-second biggest bank in Switzerland voted to allow a possible acquisition or takeover.
Though the two countries’ banking failures arise from dissimilar issues, their quick succession terrified investors and regulators worldwide. This ultimately paved the path for the U.S. government to implement steps to prevent further bank runs. President Biden insisted that taxpayers would not pay for the bank bailouts of SVB and Signature Bank. The Chair of the Federal Reserve, Jerome Powell, covered the collapses with FDIC funds that banks normally pay into although their typical coverage caps at $250k.
So what’s the problem?
One problem is that we are heading into a stagflation. A stagflation is an inflationary environment, where dollars lose their value, and the economy remains stagnant. You’re probably thinking that there isn’t a stagnant economy, because unemployment is at an all time low. However, low unemployment is inflationary, the Fed Chair saving SVB from its bad bet is inflationary, and simultaneously rising interest rates slow down our economy.
Additionally, rising interest rates contributed to SVB’s collapse. Bonds go down when interest rates rise. This is because older bonds go down in value, so SVB’s bonds began to topple and they were overloaded comparatively to other banks. Its customers began to worry and started pulling their money out like patrons running from a fire in a crowded movie theater. A majority of their customers include rich individuals and investors who were saved by the Fed.
A benefit of the Fed’s rescue allowed companies that do payroll with SVB to pay their employees. But not everyone is convinced that the banking system is sound. There has been a large influx of cash into too-large-to-fail banks such as Chase and Bank of America. Beyond that, the synchronous quantitative tightening from rising interest rates and quantitative easing from the Fed. allows wealthy individuals and corporations to privatize gains while the working and middle class socialize losses through spiraling inflation.
In summary, there is an inflationary environment from bank bailouts and low unemployment, while interest rates are simultaneously rising. This prevents average Americans from making big purchases like cars and houses while their cost of living continually rises. The gap between the rich and the average will continue to broaden.
Please check out more on the SVB Collapse series below.
*The views expressed in this article do not represent the views of Santa Clara University.