7 key questions about Silicon Valley Bank’s collapse, answered

WASHINGTON — It was a scene straight out of the Great Depression: a major California bank locking its doors and pulling down the shades as a horde of panicky depositors demanded their money.

And hard on the heels of the collapse of Silicon Valley Bank, New York state regulators shut down another midsize bank called Signature Bank.

Federal officials rushed to insist that there’s no call for panic, but the news shook millions of people who entrust their modest means to banks.

So who’s to blame? Is it time for ordinary Americans to start worrying?

Here, in question-and-answer form, is the best information available.

According to government officials and many outside experts, U.S. banks in general are much stronger today than they were before the great financial crash in 2008.

Since then, lending practices overall have been considerably more prudent.

And the banking system has significantly boosted its capital buffers to cover possible losses. Banks have also improved their ability to convert assets to cash if they face a surge in demands for withdrawals.

No worries unless you have more than $250,000 sitting in your account or have picked one of those rare banks not a member of the Federal Deposit Insurance Corp.

In the case of Silicon Valley and Signature banks — which were FDIC members — authorities said they would make an exception and ensure depositors get all of their money, even amounts above $250,000. The action was aimed at quelling panic and more bank runs. Silicon Valley had many depositors with much more than $250,000.

It’s possible that the feds could raise the current deposit guarantee cap more broadly, as they did during the 2008 financial crash.

A lot of companies keep more than the FDIC insured limit in banks. So when it comes to your paycheck, it depends on how carefully your boss chose its bank. And how much attention your employer pays to what the bank is doing.

Among other problems, Silicon Valley Bank and Signature had significant exposure to crypto markets, which made them outliers in the banking world.

That said, because lenders with less than $250 billion in assets are exempt from more stringent stress tests and liquidity requirements, it’s not clear how many banks might be vulnerable.

What’s known is that the Federal Reserve’s rapid interest rate hikes — the fastest in four decades — have left banks with unrealized securities losses totaling more than $600 billion as of the end of last year.

Still, the Fed’s move over the weekend to provide liquidity support for banks holding safe assets like Treasury bonds should help to limit the spread. And major banks, which were the core of troubles in the 2008 crisis, “are likely to prove more robust this time around,” said analysts at Capital Economics.

Not entirely, but it didn’t help.

In May 2018, then-President Trump signed into law provisions that rolled back key elements of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed after banks cratered in 2008. Specifically, it changed the threshold for making regional institutions like Silicon Valley Bank face tougher regulatory scrutiny.

Under Dodd-Frank, banking companies with assets of $50 billion or more were subjected to the most stringent rules that included enhanced capital requirements and so-called stress tests to determine liquidity risks.

The 2018 law — passed with bipartisan support — raised the asset threshold to $250 billion. And as of the end of last year, Silicon Valley Bank had assets of about $209 billion.

“Certainly there would not have been the same kind of fallout and panic if the regulations had not been changed,” said Josh Lipsky, an economics policy expert at the Atlantic Council. “But,” he added, “that’s only part of it.”

Silicon Valley Bank didn’t crater because it had too many bad loans made to tech firms. Rather, it was a classic bank run caused by a perfect storm of events.

Sure, the bank was overexposed to a struggling tech industry, but that was compounded by the fact that it had mostly large depositors, which is unusual for a community lender.

Until last spring when it began raising interest rates, the Fed’s rock-bottom rates and easy-money policies, coupled with pandemic stimulus and surging stocks, left many investors and venture capitalists flush with cash.

They funded start-ups and other entrepreneurs, which in turn put their money in Silicon Valley Bank. But more than 90% of the bank’s deposits were not covered by the $250,000 federal insurance deposit guarantee.

Silicon Valley Bank’s assets, meanwhile, were largely in long-term securities, which had fallen sharply in market value thanks to the Fed’s rapid rate hikes to fight inflation.

So when a burst of depositors initiated withdrawals on March 9, reacting in herd fashion a day after the bank announced it was raising capital, Silicon Valley Bank was caught short. It may have had enough assets, but the bank didn’t have enough time as it incurred serious losses in the value of its long-maturity Treasury bonds and mortgage securities.

By close of business March 9, it was almost $1 billion short of cash to cover the withdrawals.

Absolutely, says Lawrence J. White, an expert on bank management and regulations at New York University. “Bank regulators were asleep at the switch,” he said.

The Fed had primary oversight of Silicon Valley Bank, but it being a California-chartered bank, state officials also had a role.

The heightened risks were plainly evident as soon as interest rates started to jump. Moreover, executives at other, much-smaller community banks said that even without the stricter requirements for too-big-to-fail financial institutions, examiners would normally raise concerns and seek to slow banks that experience very rapid growth.

The average balance of Silicon Valley Bank’s deposits had more than doubled in two years to $186 billion in 2022. So making sure that it had enough short-term liquidity capability to meet withdrawal demands should have been a given.

“This is something regulators, knowing what the investments were like, should have been conscious of and should have said, ‘Oh, there are potential problems here,’” said White.

The sudden collapse of the nation’s 16th-largest bank has prompted lawsuits and immediate calls from lawmakers and bank authorities for investigations.

“The events surrounding Silicon Valley Bank demand a thorough, transparent and swift review by the Federal Reserve,” said Jerome H. Powell, chair of the Federal Reserve System.

It’s clear that bank managers, led by Chief Executive Greg Becker, failed to hedge their bets. They didn’t sufficiently diversify their deposit base, and loaded up on long-maturing assets.

But that bank regulators failed to step in earlier has fueled speculation that Silicon Valley Bank was too close to bank authorities. Up until the day it was seized, Becker had been on the board of directors at the Federal Reserve Bank of San Francisco.

What’s more, Becker had personally pushed lawmakers to ease Dodd-Frank rules for banks like his, a lobbying effort that was ultimately successful.

Most economists say no, at least not by itself.

The latest report on consumer prices shows the rate of inflation continuing to slow. Job growth, meanwhile, has held up very well.

Certainly one of the biggest threats is if there’s a loss of confidence in the banking system, but so far the quick response by U.S. authorities seems to have averted outright panic.

And there’s one silver lining in the latest bank crisis: The Fed is likely to pause its rate hike campaign next week, and may cut back on how much more it will do in the months ahead.

“To entertain a rate hike now in the midst of this crisis is a bridge too far,” said Chris Rupkey, chief economist at Fwdbonds in New York. “It’s time for them to sit, watch and wait.”