Behind the failure of Silicon Valley Bank
Interview with Professor of Economics Masao Suzuki
In 2023, there have been many announcements of layoffs by technology firms. This is a result of what the media calls post-COVID normalization. But this “normalization” has also shown that many technology companies that boomed during the pandemic were in fact overproducing and building new capacity too quickly, forcing them now to scale back. In the past ten days this slowdown in the technology industry spilled over into the banking system, triggered by the failure of Silicon Valley Bank, based in Santa Clara, California. Soon after the failure of SVB on Friday, March 10, regulators shut Signature Bank in New York. First Republic bank, headquartered in San Francisco, had to borrow $30 billion from other banks, under the direction of the Federal Reserve. The crisis even spilled overseas, as the troubled Swiss banking giant Credit Suisse was forced to sell itself to the even larger Swiss bank UBS. Fight Back! News sat down with Professor Suzuki to ask him about this crisis. Fight Back!: How is the failure of Silicon Valley Bank related the crisis unfolding in the technology industry?
Masao Suzuki: Because of the slowdown in Silicon Valley, many SVB’s depositors began to pull more and more of their deposit money out because revenue and new capital was not coming in fast enough. To meet their depositors’ demand for their money, SVB had to sell many U.S. government bonds that they had bought with their depositors’ money.
Buying U.S. government bonds is widely seen as safe, as there was almost no risk that the U.S. government would default on this debt. It would seem that this was a very good way to balance against the risk of loans that SVB made to technology startups.
One the failures of the bank and its leadership was that they did not take into account the interest rate risks of the bonds that the bank owned. This risk to owning bonds is that if interest rates go up, the price of the bonds go down, since they pay a fixed interest payment, or coupon. With the Federal Reserve raising interest rates to slow the economy to fight inflation, the market price of these U.S. government bonds began to fall. This wouldn’t matter if SVB was able to hold the bonds until they matured, and the U.S. government paid off their full face value.
The bonds that Silicon Valley Bank had to sell to pay off their depositors were sold at lower prices, causing billions of dollars of losses. When SVB made plans to raise more capital to offset these losses by selling stock, depositors panicked, and California regulators shut down the bank on Friday morning, March 10.
Fight Back!: Were there other reasons that contributed to the failure of Silicon Valley Bank?
Suzuki: One other important reason was rolling back the regulation of bigger banks. Following the 2008 financial crisis, the Dodd-Frank law was passed, increasing regulation of larger banks with at least $50 billion in assets, among other things. But in 2018 Dodd-Frank was weakened under the Trump administration, to raise the limit for greater regulation to $250 billion.
Silicon Valley Bank grew quickly to more than $50 billion in assets in 2017. Facing increasing regulation, the CEO of SVB, along with other banks, lobbied to weaken Dodd Frank, and those reforms passed into law in 2018. By 2023, just before it failed, SVB had grown to more than $200 billion in assets, and yet still had lighter regulation like much smaller banks.
Fight Back!: Was that the only other factor?
Suzuki: A third factor is that depositors pulled their money out at a much faster rate than in the past. The last time a bigger bank failed, Washington Mutual in 2008, it took a week for depositors to pull out 10% of its deposits. This gave regulators time to find a buyer – J.P. Morgan Chase – and allowed them to shut the bank over a weekend.
With Silicon Valley Bank, depositors tried to withdraw an amount equal to 25% of total deposits in one day, Thursday, March 9. This was because more than 90% of SVB’s deposits were large, with more than the $250,000 in deposits that are insured. Facing possible large losses, depositors tried to pull tens of billions of dollars. Electronic banking made this even faster.
Fight Back!: Will the deposits of working people be at risk?
Suzuki: Bank deposits are insured by the Federal Deposit Insurance Corporation or FDIC. The banks pay insurance premiums to the FDIC that provide the money to cover deposits at failed banks. I doubt many readers of Fight Back! have more than $250,000 in a checking or savings account at a single bank. But if you do, it would be safest to move your money to separate banks so you have no more than the insured limit at any single bank.
Because the failure of Silicon Valley Bank was quickly followed by the failure of Signature Bank in New York, the FDIC said that it would cover all the deposits of the failed banks, in an effort to stop the banking crisis spreading any further. The Federal Reserve also created a special program to lend to banks and twisted the arms of some big banks to lend up to $30 billion to First Republic Bank. First Republic, based in San Francisco, was just slightly smaller than Silicon Valley Bank, and also had a large number of uninsured deposits, like SVB.
While the Biden administration and others continue to stress that the banking system is “fundamentally sound,” the fact the government continues to provide aid to other banks says otherwise.