The collapse of Silicon Valley Bank: A one-off calamity, or sign of more trouble for California?
On Friday morning, California saw something the country hasn’t witnessed since the bad old days of the 2008 financial crisis: the collapse of a major bank.
California regulators seized Silicon Valley Bank — a storied cornerstone of the start-up economy, and, as of last year, the country’s 16th largest bank — declaring it to be “conducting its business in an unsafe manner” and insolvent.
The bank plans to reopen Monday under the stewardship of bank regulators with the Federal Deposit Insurance Corporation, which announced late Sunday that it planned to guarantee all deposits. It took that step in response to panic across the Bay Area that businesses and nonprofits with millions of dollars in the failed bank’s vaults might be unable to access their cash and be forced to shutter.
Now, Silicon Valley investors, start-up employers, California budget analysts and lawmakers are watching closely to see whether this is the end of a minor crisis — or just the beginning of a major one precipitated by higher interest rates.
Gov. Gavin Newsom welcomed the Sunday afternoon federal intervention, saying in a statement that it will have “profoundly positive impacts on California … ensuring our innovation economy can continue to grow and move forward.”
Meanwhile, a spokesperson for the Newsom administration’s Department of Finance said it was still far too early to say what the bank failure and its attendant economic impact might have on the state’s already dragging budget picture.
Silicon Valley Bank’s sudden demise will be studied and debated for weeks and months to come. But for all the bank’s association with innovation and newfangled tech, the factors behind its collapse seemed to be, in the words of Bloomberg columnist Matt Levine, “sort of boring and normal” as far as bank failures go.
Long story short: Depositors began withdrawing money just as the bank’s investments began to tank.
On the depositor side, much of the bank’s money came from start-ups and other Silicon Valley savers. Driven by higher borrowing rates and the end of a pandemic surge in demand for remote everything, Silicon Valley has seen a parade of layoffs this year and depositors with the bank have been drawing down their savings. Higher interest rates also led many of those savers to seek out higher returns for their cash elsewhere.
This drawdown required the bank to cash out some of its investments. Unfortunately for the bank, many of those were in long-term Treasuries and mortgage-backed securities. As the Federal Reserve has cranked up interest rates to quell inflation, the value of those assets plummeted. Thus, on Wednesday, the bank announced losses of $1.8 billion.
Spooked by that news, many depositors tried to take all their money out at once. The next day, $42 billion disappeared from the bank’s digital vaults, according to California regulators, a mass withdrawal urged on by some tech sector giants, including the venture capital fund co-founded by conservative billionaire Peter Thiel.
The result: an old-fashioned bank run the likes of which even Jimmy Stewart would recognize.
A casualty of anti-inflation policy
Some commentators have been less charitable to the erstwhile bank, arguing the bank’s management did little to calm skittish investors leading to “an own goal” of epic proportions.
Because the bank’s financial troubles can be traced back to higher interest rates, Silicon Valley Bank might be called the first major casualty of the Federal Reserve’s anti-inflationary policy.
The big question is whether it will be the last. After the federal takeover, investors raced away from similarly positioned regional banks, worried that they too might be facing a borrowing rate squeeze.
Those who held cash with Silicon Valley Bank were protected, but only to a point. The Federal Deposit Insurance Corporation backs deposits up to $250,000. That wasn’t likely to help many of the bank’s clientele, disproportionately made up of start-ups with millions socked way.
It was that fearsome prospect of tech companies across northern California suddenly finding themselves cashless and unable to make payroll that ultimately led the federal government to intervene.
One venture capitalist warned of a “mass shutdown of all American startups.” Reporting over the weekend highlighted the potential collateral damage that could befall everything from affordable housing projects to the Napa wine industry to solar panel producers. Bay Area politicians called for urgent federal action.
On CBS’ Face the Nation on Sunday morning, Silicon Valley Rep. Ro Khanna urged the federal government to ensure that “all depositors will be protected and have full access to their accounts.”
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