SVB’s downfall was linked to its decision to invest heavily in long-term US government bonds, including those backed by mortgages. These bonds were considered safe and profitable, as they offered higher yields than short-term bonds and had low default risk. However, when the Federal Reserve started to raise interest rates rapidly to combat inflation, the bond prices fell sharply, eroding SVB’s capital.
SVB was unable to hold the bonds until maturity, as it faced a surge in withdrawals from its customers, who were affected by the economic downturn and the tech sector slump. SVB had to sell some of its bonds at a loss, which triggered a panic among its investors and customers. Within 48 hours of announcing a $1.75 billion capital raising, SVB collapsed, becoming the largest bank failure since Washington Mutual in 2008.
SVB’s Customers and Investors Left in Limbo
SVB’s customers and investors were left in limbo after the bank’s collapse, as they waited for the regulators to sort out the mess. SVB had over 17,500 customers, mostly tech companies and startups, who relied on the bank for their business banking needs. SVB also had thousands of investors, who held its shares, bonds, and other securities.
The Federal Deposit Insurance Corporation (FDIC), which insures deposits up to $250,000, stepped in to protect SVB’s depositors, and announced that it had sold SVB’s deposits and loans to First Citizens Bank, a North Carolina-based bank. However, some depositors had more than $250,000 in their accounts, and they faced the risk of losing some of their money. The FDIC said that it would try to make all depositors whole, even those with uninsured funds, but it could not guarantee it.
The FDIC also said that it would liquidate SVB’s assets and pay its creditors and shareholders according to their priority. However, the FDIC warned that it could take years to complete the process, and that there was no assurance that the creditors and shareholders would recover anything. SVB’s shares, which traded at over $200 before the collapse, were delisted from the Nasdaq and became worthless.
SVB’s Collapse Raises Questions About Banking Regulation
SVB’s collapse raised questions about the adequacy and effectiveness of banking regulation in the US, and whether the regulators had failed to prevent or mitigate the bank’s problems. According to a report by the Federal Reserve, which oversees SVB and other large banks, the blame was ultimately attributed to the bank’s management, the regulator, and social media.
The report said that the bank’s management had made poor investment decisions, failed to diversify its portfolio, and underestimated the risks of rising interest rates. The report also said that the regulator had not detected or addressed the bank’s weaknesses in time, and had not communicated clearly with the bank or the public. The report also said that social media had amplified the bank’s troubles, as rumors and misinformation spread online, fueling the bank run.
The Federal Reserve said that it had taken steps to improve its supervision and regulation of the banking sector, and to prevent future bank failures. One of the steps was the launch of the Bank Term Funding Program, which provided low-cost funding to banks that met certain criteria, such as having a high-quality loan portfolio and a strong capital position. The program was designed to enhance the liquidity and resilience of the banking system, and to support lending to the real economy.
