Silicon Valley Bank failed in rapid, stunning fashion on Friday. This week, the tech and banking sectors are increasingly hesitant about the next shoe to drop.
What happened Friday was an old-fashioned bank run: Customers pulled $42 billion from Silicon Valley Bank on Thursday, leaving the bank with $1 billion negative cash balance, the company said in a regulatory filing. In other words, the bank owed customers more than it had on hand. SVB and federal regulators scrambled but were unable to raise enough capital to cover the gap, and the bank was declared insolvent on Friday.
The Federal Deposit Insurance Corp. took control of the bank and said it would pay customers their insured deposits on Monday. But there’s a catch: The FDIC covers just $250,000 in customer deposits. At the end of last year, Silicon Valley Bank said it had $151.5 billion in uninsured deposits, of which $137.6 billion were held by American customers.
While customers could collect some of their uninsured deposits as the government unwinds and liquidates the bank’s assets to pay them back, it’s not clear that the companies investing in the bank will get back all or nearly all of the cash they had save to SVB.
This has led to two big fears and a single call to action: Investors worry that other banks with similar profiles to SVB could be next to fail. Wall Street also worries that tech companies that have kept their cash in Silicon Valley Bank could collapse. This is why the demand for a government bailout is increasing.
It may be coming – but it probably won’t be anything like the last one.
Tightened US regulations after the 2008 financial crisis led the biggest, most systemically important banks to tighten emergency reserves to weather storms like the current one. This means that the global banking system is not in danger of collapsing like it was a decade and a half ago.
“The banking system as a whole is more resilient, it has better foundations than before  financial crisis,” White House Office of Management and Budget Director Shalanda Young told CNN’s Kaitlan Collins on “State of the Union.” “This is largely due to the reforms that have been made.”
Some of SVB’s problems were unique to the bank: It provided financing for nearly half of US venture-backed technology and health care companies, so it had nearly all of its eggs in one basket. Most banks have better diversification than this.
But that’s not all: Wall Street investors have sent shares of smaller banks plummeting in recent days. First Republic Bank ( FRC ), PacWest Bancorp ( PACW ) and Signature Bank ( SBNY ) fell so much on Friday that they tripped a circuit breaker and temporarily halted so nervous investors could catch a breather. First Republic stock has fallen 29% in the past two days. Signature is down 32%.
That sent the broader stock market down more than 3% on Thursday and Friday as widespread speculation prompted customers to start pulling their money out of smaller banks as well, perhaps echoing the long-running savings and loan crisis. part of the 1980s and early 1990s.
As the Fed raised interest rates at a record pace and the value of bank bonds began to collapse, the gap between what banks were paying for the bonds and what they were worth widened dramatically: Banks had losses of $620 billion at the end of last year. according to the FDIC, and some small banks may be sucked into the abyss without help.
And companies that had huge uninsured deposits with SVB may not be able to make payroll or do business next week. Many tech startups said they were trying to figure out their next steps and whether they could survive their bank’s sudden collapse. A popular crypto stablecoin cycle hit an all-time low this weekend. Bankruptcies, insolvencies, layoffs and many other disruptions could follow next week if SVB’s clients are not made whole.
Calls for a bailout grew over the weekend from Silicon Valley to Wall Street. These calls may go unanswered.
Treasury Secretary Janet Yellen was in contact with financial regulators over the weekend and was working with them “diligently” after the collapse of Silicon Valley Bank, Young told CNN. But Yellen pushed back on bailing out the bank in an interview with CBS Sunday.
“Let me be clear that during the financial crisis, there were investors and owners of systemic big banks that got bailed out … and the reforms that have been put in place mean we’re not going to do that again,” Yellen told CBS. . “But we are concerned about depositors and are focused on trying to meet their needs.”
However, Yellen suggested that the government might try to do something to support companies that had large, uninsured deposits with SVB.
“We are well aware that many startup companies have deposits and venture capital firms have deposits in this bank that have been affected by its failure,” Yellen said. “So that’s something we’re working to try to resolve.”