Confused about what happened during the recent banks collapse?
On Friday, Silicon Valley Bank, the 16th largest bank in the United States, was taken over by the FDIC following a run on the bank that occurred on Wednesday.
By the end of Thursday, customers had withdrawn a staggering $42 billion in deposits. SVB primarily catered to technology workers and startups, including some of the biggest names in Silicon Valley, like Roku.
On Sunday, The Federal Reserve, Treasury Department, and Federal Deposit Insurance Corporation announced they would cover uninsured SVB deposits.
Related: Silicon Valley Bank Gets a Bailout While Main Street Struggles To Survive
CNBC reported that “On Friday, Signature Bank customers spooked by the sudden collapse of Silicon Valley Bank withdrew more than $10 billion in deposits. ”
This led to the third-largest bank failure in U.S. History.
What Exactly Happened?
Lucjan T. Orlowski, Ph.D., Professor of Economics and Finance at Sacred Heart University, explained exactly what happened that led to these bank failures.
Lack of Proper Management
He explains, “First, SVB’s lack proper management of interest rate risk. This risk has been increasing with rising interest rates stemming from the ongoing monetary tightening. The bank has incurred a sizeable duration gap, i.e., a maturity mismatch between liquid deposits and long-term assets, namely, large investments in long-term securities. A large portion of assets was invested in long-term US Treasuries that started to decline in value amid increasing interest rates.”
He said, “In addition, its loan portfolio was lacking diversification as it focused mainly on startups and tech companies. Under rising interest rates and declining prices of fixed-income securities, SVB has incurred very large negative ‘accumulated other comprehensive income’ (AOCI) i.e., losses on the available-for-sale securities. (AOCI loss for SVB has reached 1,912 million dollars or 11% of its equity capital). These losses triggered a bank run on SVB deposits that came mostly from startups. The panic spread out very quickly, being propagated on social media platforms.”
Flaws in Regulatory Supervision
He continued, “Second, there have been flaws in regulatory supervision. The regulators should have foreseen and addressed the mounting interest rate risk in the banking sector. The Federal Reserve should have paid more attention to the exposure of many banks to the interest rate risk stemming from its policy tightening decisions. The US Treasury’s Financial Stability Oversight Council did not adequately address these problems either. The Council’s agenda has recently focused on overseeing banks for risks related to climate change but disregarded the repercussions of rising interest rates in the banking sector. ”
Mark Cuban took to Twitter to ask, ” Where were regulators? They are supposed to watch and warn.”
AOC answered, “The regulators were there until SVB lobbied Congress to remove the guardrails that prevent this kind of crisis in the first place. Warnings were everywhere. SVB, like many gamblers before them, knew what they were doing. Let the FDIC open the books & see what it’s working with.”
No Need for Panic
Orlowski reassured that the average consumer does not need to panic, “Most of the US banks are financially sound, well managed and prepared to face increasing risk associated with the monetary tightening. American depositors should not worry about the safety of their deposits. Especially since the FDIC has just stepped in and extended insurance of bank deposits beyond the $250,000 ceiling. In all, a full-scale systemic crisis in the banking sector is not in sight.”
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