On Wednesday, March 8, 2023, Silicon Valley Bank (SVB) announced to investors that it needed to raise $2.25 billion to shore up its balance sheet. A few days earlier, another bank (Silvergate Capital) announced it would cease operations and liquidate its assets. And a third bank (Signature Bank) was seized by the FDIC on March 12.
SVB’s announcement triggered the second-biggest bank collapse in U.S. history (Washington Mutual, 2008) as panic set in among the bank’s venture capital and technology customer community that it served for 40 years. As of December 31, 2022, SVB was among the top 20 U.S. commercial banks with $213 billion in total assets and had experienced rapid growth of over 215% between year-end 2019 and 2022.
By Thursday, customers withdrew $42 billion, leaving the bank insolvent with a negative cash balance of $958 million. California regulators closed down SVB on Friday, and FDIC took over that same day. Panic ensued.
Funds transfers and efforts by depositors to withdraw funds from SVB were not completed and remained in “pending” status through the weekend. Two days later, likely in response to the SVB collapse, depositors made a run on another bank (Signature Bank) by attempting to withdraw funds which resulted in the FDIC seizing Signature Bank to prevent further problems.
On the evening of Sunday, March 12, The Treasury Department, Board of Governors of the Federal Reserve System (Federal Reserve), and Federal Deposit Insurance Corporation (FDIC) released a joint statement confirming that “Depositors will have access to all of their money starting Monday, March 13.” According to the joint statement, “This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.”
Where are we now? What are the main takeaways?
Over the last week, much has been said about SVB. Customers are concerned about the protection of their money and their financial institutions. What should we do?
You should not make any hasty decisions, and should not panic.
The recent collapse of SVB, Signature Bank, and Silvergate Bank all shared common traits: a lack of diverse deposit bases and clienteles (heavily focused on the technology sector), leaving them in vulnerable positions, the management of their investments portfolio, and board/management and regulatory oversight all contributed to their downfall. But not all financial institutions are the same. There are some significant differences between financial institutions; some operate under entirely different business models. The regulators must help distinguish between those financial institutions that operate with more risk and those that do not. As stated by the regulators, “the banking system remains resilient and on a solid foundation.”
SVB’s customer base was concentrated in the technology sector, made up of venture capital firms, start-ups, and technology and technology-adjacent companies, such as Roku and Vox Media. In 2020, in the height of the pandemic, business boomed for SVB’s technology customers and bank deposits increased by over $100 billion. Signature Bank and Silvergate Bank were also heavily concentrated in cryptocurrencies, which has also suffered substantial losses in the last year.
In 2021, amidst record-low interest rates, SVB invested billions into long-term U.S. Treasury bonds. A problem with these bonds is that they risk losing value if interest rates rise, which took place in 2022 as the Fed attempted to fight off rising inflation (calling into question whether additional rate hikes by the Fed could be counterproductive). This was combined with inflation taking its toll on tech companies and fundraising being on the downswing, particularly for start-ups, so customers pulled out monies to keep their operations afloat, leaving SVB shorter on capital.
Sitting on unrealized losses, SVB ended up selling all of its available for sale bonds at a $1.8 billion loss, the company reported. Although SVB could have held the bond to maturity and suffer no loss on the investment, SVB chose a course of action to liquidate those investments in an attempt to raise needed cash. When SVB announced the bond sale and that it needed to raise $2.25 billion to shore up its balance sheet, panic ensued and a bank run occurred.
In many ways, what took place with SVB could be attributed to a delayed effect of the 2020 COVID pandemic - recovery funds, PPP loans, government checks sent to people - there was so much cash in the system from the government in 2020-2022, and it is now being depleted. Financial institutions are having to borrow money and are looking for ways to grow deposits. In some cases, large depositors are looking for higher rates (for funds on deposit) than many financial institutions are offering.
No Reason Not to Do Due Diligence on Your Assets
One takeaway from the SVB collapse is the importance of becoming more educated. Other takeaways are the need to ensure proper corporate governance and risk determinations are in place for the bank. Customers should perform proper due diligence regarding how their money is protected and ask their financial institutions questions. Become familiar with how and where your assets are held. You should also know how and where your vendors (i.e., payroll companies) may be holding your assets.
For example, do you know whether your accounts are segregated from your bank’s assets? If your accounts are not segregated, are you familiar with the safeguards your bank puts in place to protect amounts above the FDIC deposit insurance limits? Many financial institutions offer robust treasury management services (including a variety of sweep accounts) to help mitigate against risk and maximize the availability of FDIC insurance. Becoming familiar with the regulations in place for deposit insurance is a key party of your due diligence.
Businesses should talk to their financial institutions, consultants, and attorneys about various options. Most financial institutions are transparent with deposit insurance but all customers are encouraged to be proactive with asking questions, and financial institutions are encouraged to be more proactive with customers to advise them of options and to help alleviate unfounded concerns and anxiety in the marketplace.
In sum, there are many well-run, diversified portfolio financial institutions in your communities and their images should not be tarnished by the collapse of SVB. Each financial institution is different in its approach to corporate governance, risk tolerance, and investment policies. It is essential that all financial institutions review and consider that status of those internal policies in the current environment.
We understand this is a very fluid situation, and we will continue to monitor the news and ensuing fallout from the SVB collapse. We will continue to keep you informed of the latest financial and legal developments around the financial services and banking industry.
About Our Authors
Lou Ursini is the Adams and Reese Financial Services Practice Group Leader and a Partner in the firm’s Tampa office.
Phil Buffington is the Adams and Reese Financial Services-Community Bank Team Leader and a Partner in the firm’s Jackson Office.
Scott Jones is an Adams and Reese Partner and an attorney advising financial institutions on payment, operational and compliance issues throughout the United States.
Jacqueline Feliciano is an Adams and Reese Associate in the firm’s Tampa office. She has a Master of Laws in Taxation and is a middle-market mergers and acquisitions attorney.