The Collapse of Silicon Valley Bank

You may have read or heard President Joe Biden trying to calm the financial market over the weekend, stating that the federal government will guarantee deposits made at Silicon Valley Bank and Signature Bank of New York, both of which collapsed last week.What happened to Silicon Valley Bank?You may have never heard of this bank, but Silicon Valley Bank (SVB) has deposited fortunes mainly from companies in the tech sector. Although it has few branches, it was once among the top 20 banks in the United States.Regulators closed SVB on Friday (10) after the bank suffered a sudden collapse. Just two days earlier, SVB had signaled that it was facing a cash crisis. First, it tried to raise money by selling shares and then attempted to sell itself. It didn’t work out.The cash crisis stems from rising interest rates. SVB receives deposits from clients and invests them in generally safe securities. As the Central Bank has been raising interest rates, these securities have decreased in value. Normally, this wouldn’t be a problem if clients were willing to wait for the maturity of these securities. But combined with a broader slowdown in venture capital in the tech area, deposit flows decreased and clients began to withdraw their money.On Sunday (12), the federal government announced it would intervene to ensure that all clients with deposits at the bank would have access to their funds.Another bank was closedAlso on Sunday (12), regulators decided to close another bank, Signature Bank, a financial institution in New York with a large volume of real estate loans, which had recently been more focused on cryptocurrency deposits.To some extent, Signature Bank is a victim of the panic surrounding the collapse of Silicon Valley Bank. Its closure highlights the challenges faced by small and medium-sized banks, which often focus on niche business lines and have a more restricted customer base than giants like JPMorgan Chase or Bank of America. This leaves them especially vulnerable when clients suddenly decide to withdraw their money from the system.Panic arose because the Federal Deposit Insurance Corporation (FDIC), an independent agency created by Congress to maintain stability and public confidence in the country’s financial system, guarantees deposits up to $250,000. Many clients of Signature Bank feared that their deposits might be at risk because, like the business clients of Silicon Valley, most had more than $250,000 in their accounts. In a situation like this, they prefer to transfer their money to larger institutions or even spread their money across different deposits and different institutions to ensure FDIC protection.Financial market wakes up scaredDespite the federal government’s assurances over the weekend, investors indicated on Monday (13) that the president’s announcement was not enough to calm them. Shares of regional banks fell to record lows, with prices being quite volatile.Should I be worried about my bank?The banking sector in general is fine. SVB would likely have survived if everyone hadn’t panicked at the same time. But as experts say, there is always the risk of contagion because the banking system is fundamentally a game of trust.Still, you don’t need to start withdrawing your dollars from your bank and hiding them under the mattress. Remember that up to $250,000 in bank deposits are insured by the federal government, so unless you have more than that, there’s no reason to worry.Source: Vox and The New York Times