It only took 48 hours for Silicon Valley Bank, formerly the nation’s 16th largest bank, to collapse. Then Signature Bank followed suit, while First Republic Bank and others showed signs of contagion.
SVB, with roughly $200 billion in deposits, became the second biggest bank failure in U.S. history last week. This week, regulators are scrambling to contain the contagion while making depositors whole.
President Joe Biden and bank heads are attempting to reassure Americans that their deposits are safe so bank customers won’t rush to withdraw funds, potentially triggering more bank runs.
“Americans can have confidence that the banking system is safe,” Biden said Monday. “Your deposits will be there when you need them.”
The bank run on SVB happened after customers attempted to withdraw $42 billion on Thursday following news the bank was selling assets at a loss and planning to raise capital. SVB was primarily a bank for venture capitalists and startups, and some large VC firms encouraged companies to pull money at the sign of trouble. Quickly, the bank became unable to fulfill the requests and the federal government took control of the bank.
“The simple mistake is that they bet the Federal Reserve wouldn’t raise rates as quickly and as precipitously as they did,” said Bartlett Naylor, financial policy advocate for Public Citizen. “They took in a ton of cash, largely in part from some of their clients who are startups…they used that cash and just stuck it in low-interest-bearing treasuries and other securities.”
When the Fed raised rates, the securities SVB held became devalued because people could secure higher interest rates, which meant that to liquify assets to meet withdrawal requests, SVB had to sell the bonds at a loss instead of being able to wait until they matured.
“They were stuck,” Naylor said.
Many, especially on the left, are in part blaming rollbacks to banking regulations that took place under the Trump administration in 2018. With bipartisan support, then-President Donald Trump eased regulations established following the 2008 financial crash, reducing requirements of strict supervision to banks with at least $250 billion in assets, as opposed to the previous $50 billion threshold. That change removed SVB from heightened scrutiny, with around $200 billion in deposits.
“Unfortunately, the last administration rolled back some of these requirements. I’m going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely this kind of bank failure would happen again,” Biden said.
“Tough to prove a counterfactual,” Naylor said. “They were empowered to make a bad bet. There are other banks that are under scrupulous supervision that are capable of making terrible bets as well…It’s one thing to enable it, and it’s another thing to have a bad manager that takes the money and goes to the casino and loses it all.”
Biden said that the bank managers will all be fired following the collapse of SVB. Investors will also not be made whole, though depositors had access to funds Monday. Biden said no taxpayer funds would go toward fulfilling the deposits.
Regional banks continued to feel pressure on Monday, with First Republic Bank’s stock falling more than 60% in the morning, despite backing from the Fed and JPMorgan.
“Much as regulators and our president are trying to reassure us, this system runs on faith,” Naylor said.
Watch the full interview above for more on banker pay, regulation and uninsured deposits.