The sudden collapse of Silicon Valley Bank has sent shockwaves across Washington, sparking fears that its failure could threaten the financial system and rattle the economy.
Lawmakers are scrambling to get information from banking regulators and industry leaders on whether the demise of SVB — which had counted some of the world’s top investment firms among its customers — could pose a risk to other banks. SVB is the largest lender to fail since Washington Mutual went down during the 2008 global financial crisis, and its collapse is sowing concern that thousands of businesses may be unable to make payroll on Monday.
Battle lines are already being drawn over what caused SVB’s stunning demise. Progressives and some investors are blaming the Federal Reserve for its rapid interest rate hikes, which have burdened many lenders. Democrats say Republican-led deregulation of banks removed critical safeguards. Others say regulators failed to spot red flags in the bank’s investment portfolio and customer base. Many blame SVB itself.
“Imagine if politicians’ campaign funds were in SVB. Does anyone think we wouldn’t have had more action & communication?” Democrat Rep. Ro Khanna, whose Northern California district is home to the bank, tweeted on Saturday afternoon.
So far, the Federal Deposit Insurance Corp. has offered little clarity on what might happen to SVB’s more than $150 billion in uninsured deposits that support thousands of high-tech startups and health-care companies across the globe. After briefing House Financial Services Committee members on Friday, the agency on Saturday postponed a meeting with California lawmakers whose districts are among those most affected by the crisis, frustrating the Congress members.
As agency officials race to make sense of SVB’s massive loan portfolio and accounts, speculation is swirling over whether the bank will be acquired or sold off in pieces — or if a government-funded bailout might be in the works. Treasury Secretary Janet Yellen has convened regulators to monitor the fallout.
The crisis is also reigniting a fierce debate over the regulations that should be applied to large regional lenders — which are much smaller than megabanks like JPMorgan Chase and Bank of America but considerably bigger than most of the country’s nearly 5,000 banks. Congress voted in 2018 to loosen regulations on those institutions with bipartisan support.
Sen. Elizabeth Warren (D-Mass.) is renewing calls for strengthening oversight and bolstering measures that reduce bank reliance on debt — something that Fed officials have identified as a top priority. Banks have launched a lobbying onslaught to resist those efforts.
“Silicon Valley Bank’s collapse underscores the need for strong rules to protect the financial system,” Warren tweeted. “Regulators must not buckle to pressure.”
Are other banks going to collapse?
That’s the question on everyone’s minds, but there’s no reason to panic, at least not yet. For one, it’s rare for a larger bank to have customers so concentrated in one sector like high tech. And the fact that almost all of the bank’s deposits weren’t insured by the FDIC (we’ll come back to this later) made it unusually prone to a run. The current evidence suggests the bank would not have failed if the depositors hadn’t panicked.
“This is another wake-up call: you need to look at liabilities too,” not just the quality of assets like loans, said Sheila Bair, who led the FDIC during the 2008 financial crisis. “Institutional money seeking [higher] yield is not stable.”
It’s clear there were some risk-management failures by the bank, which was supervised by Federal Reserve examiners from the central bank’s San Francisco branch. Other institutions — and their bank regulators — are no doubt taking another look at their own cash management and how much they’ve exposed themselves to rising interest rates.
But even as markets grew squeamish about other regional lenders after SVB’s failure, megabanks have been largely insulated. That’s because they face stricter rules that, among other things, ensure they could sell securities at a loss and still cover heavy outflows.
Still, it’s hard to know what anxiety might bring to some corners of the banking system.
“There’s no doubt in my mind: There’s going to be more. How many more? I don’t know. How big? I don’t know,” former FDIC Chair William Isaac, who led the agency through hundreds of bank rescues during a period of soaring inflation and rocketing interest rates, said in an interview. “Seems to me to be a lot like the 1980s.”
What happens next?
The simplest option for the FDIC is to find a buyer. Usually, when a bank fails, the agency finds another bank to purchase it, and the transition for customers is relatively smooth. In this situation, the FDIC took control of the bank’s assets in the middle of the day on Friday, rather than its typical practice of waiting until the end of the day, suggesting immediate action was necessary.
It’s unclear whether any bank would be in a position to buy SVB in its entirety; a few of the megabanks aren’t legally able to buy other institutions because they already control a heavy percentage of U.S. deposits. But some other large banks could theoretically do it. The question is whether they’d want to and under what terms. Otherwise, the FDIC will have to sell off the bank’s parts, a process that could take years.
In the meantime, customers whose funds are insured by the FDIC will be able to access their deposits “no later than Monday morning.” The problem is, some 96 percent of deposits at SVB aren’t insured. That’s because there’s a $250,000 limit per account owner per bank, and its customers generally had balances well exceeding that threshold.
For now, the FDIC says uninsured depositors will receive a dividend and a certificate for the rest of their funds, though they’d also likely begin to get more money as the agency sells off SVB’s assets. And there are still scenarios where all depositors get their money back, particularly since any losses would be borne first by creditors to the bank.
There are also multiple ways the government could make SVB’s customers whole, such as guaranteeing all its deposits. The FDIC would likely need sign-off from two-thirds of the Fed board and the Treasury secretary to take such a move.
It’s possible they might be hesitant to take those steps since they have spent more than a decade trying to convince everyone that large banks shouldn’t expect bailouts when they mess up. But it depends how concerned they are about problems feeding out to the rest of the financial system.
How are Silicon Valley Bank’s customers reacting?
SVB was a key banking partner for thousands of venture-backed startups. The bank’s rapid descent into receivership forced companies to seek other banking partners — and funds — in order to stay operational.
“That’s all we’ve been dealing with for the past 48, 72 hours,” Mislav Tolusic, co-managing partner and chief investment officer at the venture firm Marlinspike Partners, told POLITICO. “Most companies in the US are on bi-monthly payroll cycle, which means the next one is on Monday.”
Rippling, a payroll services provider, was unable to send out paychecks for clients after the funds were trapped on the defunct bank’s payment rails. Roku, which manufactures streaming devices, disclosed it had more than a quarter of its cash — nearly half a billion dollars — deposited with SVB. The venture-backed toy store Camp sent an email to customers on Friday alerting them that they no longer had access to their accounts and kicked off an online sale — promo code BANKRUN — in an attempt to raise money.
The crisis has also rippled across a network of defense and biotech startups that are now unable to access their accounts.
Eliot Pence, the chief commercial officer at defense contractor Cambium, said his company will be unable to pay for necessary employees and materials until its bank accounts are restored — threatening the fulfillment of a Department of Defense contract.
“We can’t do any of that until we have clarity about cash flow and the status of SVB going forward,” he said. “I want to stay in business.”
Eleanor Mueller contributed to this report.