Anatomy of Failure: Unpacking the Silicon Valley Bank Collapse

Oh, what a year the month of March has been!

U.S. Treasury Secretary Janet Yellen, along with Federal Reserve System Chairman Jerome Powell and the head of the FDIC, Martin Gruenberg, took action to shutter Silicon Valley Bank (SVB) on March 10, 2023, resolving to make whole the bank’s depositors along with those at New York-based Signature Bank, which the FDIC took over on March 12, 2023, as receiver. Signature’s assets, excluding $4 billion in digital currency assets and $60 billion in loans, were absorbed by New York Community Bancorp of Hicksville, N.Y., through its subsidiary, Flagstar Bank, on March 19, 2023.

SVB’s failure is only second to Washington Mutual Bank’s failure on September 25, 2008, whose $307 billion in assets were eventually acquired by JP Morgan Chase & Co. SVB’s assets, $209 billion at the end of 2022, have been transferred to Silicon Valley Bridge Bank, N.A., which is 100% under the control of the FDIC for the purpose of maintaining financial stability.

“We should strive to learn more about money and banking, how the system works, and what happens when a large financial institution experiences financial difficulty. ”

Are Bank Failures New?

These recent actions are neither new nor without precedence. The financial crisis of 2007-2008 began the start of many bank failures. The financial instability brought about by these failures (to date, 539 banks have failed, leaving exposed over $1.07 trillion in customer assets) led to the passage of Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and other reform measures designed to shore up regulatory firewalls necessary to prevent large scale failures. It is interesting to note that former Massachusetts Congressman Barney Frank, one of the principal authors of Dodd-Frank, was an outside director on the board of directors of Signature at the time of its failure.

Since the law’s enactment, the number of year-to-year bank failures fell precipitously, from a high of 157 in 2010 to an annual average of 4 failures from 2015 to 2023, although the recent failures of SVB and Signature Bank represent a reversal in the dollar amount of assets held. The $343.4 billion in assets among the three banks that failed YTD 2023 is second only to the $373.6 billion in assets held by the 25 banks that failed in 2008.

Fears About the Safety of the U.S. Banking System

There’s a song from younger days (when MTV still played music videos) called Video Killed the Radio Star performed by English pop group The Buggles in 1978. The premise of the song is the advent of video (specifically music videos) was the death knell for radio. One line, a refrain toward the end of the song, is telling of the situation with the most recent bank failures and consumer fears versus what we knew and how we initially reacted in 2008:

In my mind and in my car we can’t rewind we’ve gone too far. Pictures came and broke your heart, Put the blame on VCR

Nostalgia for days gone by, with the advent of new technology in place of what was before is what this song suggests to the listener. Music videos took the place of gathering around the radio for music. The speed at which SVB and other banks were seized and taken over by the Fed mirrors the speed at which new technology, including smartphones and banking apps, enabled the movement of bank deposits instantaneously. This speed created fear, panic, and questions about the safety of the U.S. banking system.

The Role of Technology

The world of 2023 is far different from that of 2008. The ease with which banking transactions currently take place appears to be one of the factors that accelerated SVB depositors’ immediate demand to withdraw $42 billion in assets on March 9, 2023 (coupled with the demands of Signature bank’s depositors, the total amount of recent withdrawals was $100 billion). The ability of SVB depositors to hasten an immediate run on the bank’s available assets raises concern that perhaps bank regulators need to “up their game” and put in place measures to recognize and immediately act before hysteria and fear take the place of common sense and patience.

The markets have taken quite the rollercoaster ride since news of SVB and Signature’s failure (alongside issues with First Republic Bank of San Francisco and UBS’s takeover of Credit Suisse). The Dow Jones Industrial Average (an equity index of 30 large company stocks) experienced a downturn starting when SVB and other banks failed (March 8-18, 2023) but, as equity markets tend to do, has weathered the storm and is slowly rebounding.

Are Fears Unwarranted?

This is not to say fear is unfounded or unwarranted. The challenges faced in 2008 led to the definitive actions taken by the federal government and regulators to prevent a larger, widespread economic crisis. The larger effect of the Great Recession of 2008-2009, which was shorter than the 3.5 year span of the Great Depression of 1929-1932, is significant, not insurmountable. For example, the unemployment rate during the recession was 8.5%, compared to 25% in the early 1930s. (As of March 2023, according to the U.S. Department of Labor Bureau of Labor Statistics, U.S. unemployment is 3.6%, which is an indicator of positive economic health.)

Learn More About Money and Banking

As we grow in our understanding of non-traditional financial products and their risk profile, relative to what we know and have learned of the three core asset classes: equities (company stock and stock-equivalents), fixed-income (bonds), and cash and cash-equivalents (such as money market funds), we should expect more SVB stories, not fewer. We should strive to learn more about money and banking, how the system works, and what happens when a large financial institution experiences financial difficulty.

After all, video may have killed the radio star, but we still enjoy music!