How Silicon Valley Bank Failed (and Why That Probably Won’t Happen to Your Bank)
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Silicon Valley Bank has failed. What does that mean for your bank? Probably not much.
The circumstances that led to the roughly 40-year-old bank's collapse are unique and not likely to play out at other major financial institutions, says Fadel Lawandy, an associate professor of finance and director of the C. Larry Hoag Center for Real Estate and Finance at Chapman University, in Orange, California.
But before we dive into the details, here is a quick primer: On March 10, SVB collapsed due to a bank run, which is a large influx of depositors withdrawing their money concurrently due to concerns that the bank would be insolvent. Depositors got spooked after the bank's CEO told shareholders that Silicon Valley Bank had lost $1.8 billion after selling U.S. Treasury bonds and mortgage-backed securities at a loss.
SVB's downfall was anything but routine. As long as your bank is FDIC-insured, you shouldn't have anything to worry about.
In the Q&A below, Lawandy explains the unique factors that contributed to SVB's failure and how other banks are likely insulated from a similar fate. (Note that this interview has been edited for clarity and length.)
NerdWallet: The Silicon Valley Bank failure has caused a lot of uncertainty. But do everyday consumers need to worry about their own bank?
Fadel Lawandy: As of right now, this is contained to Silicon Valley Bank and small banks that tailor to businesses and new ventures. Your everyday consumer banks — banks like Chase, Bank of America, and Wells Fargo — have a lot more flexibility and are a lot more stable. It's kind of the niche of banks, if you will, that get caught in these types of situations.
NerdWallet: Why are those larger financial institutions safe?
Fadel Lawandy: Think of Silicon Valley Bank as the bank for brand-new companies. When the cost of everything goes up because of inflation, those new companies need to spend more money. So those companies' withdrawals went up because of inflation and the cost of doing business.
Those withdrawals moved faster than the bank's [ability] to have liquidity. That's not to say they didn't have the assets, but Silicon Valley Bank didn't have the cash available because it used the money held in the bank to buy Treasury bonds. With the increase in interest rates, Treasury bond prices go down.
So these aren't real numbers, but basically, Silicon Valley Bank bought Treasury bonds at $100, and then those bonds' value went down to $75. So Silicon Valley Bank had to sell some of those bonds to generate cash that their depositors needed. And when the bank sells something at a lower price than it bought it for, it has to record that loss.
Had Silicon Valley Bank held those bonds on its balance sheet until maturity — until the bond is over — it would not have had that loss. The bank only recognized the loss because they had to sell the bonds. And they had to sell the bonds because they had to generate cash to give to their depositors because their depositors were spending more money than they historically had.
It's like, which comes first — the egg or the chicken? It's that situation.
NerdWallet: It sounds like larger, well-established banks are more insulated from failure because they don't just cater to tech startups.
Fadel Lawandy: I can't emphasize enough the diversification of their client bases. When you're big from a depositor's perspective, you have big client diversification. So all your clients don't have the same needs. If one group of clients needs more cash, another group of clients might want to save cash. So, there's that diversification in their loans, investments and clients. That minimizes exposure as it relates to the needs of one group of clients.
Also, FDIC [Federal Deposit Insurance Corporation] insurance covers up to $250,000 of your deposits at the bank. In other words, the federal government ensures that if a bank goes belly-up, any money that you have with that bank, up to $250,000, is insured.
NerdWallet: What about credit unions or community or regional banks? Do they have similar protections?
Fadel Lawandy: Credit unions don't have huge ventures that are burning through a couple of million dollars a month in expenses. The dynamics of these banking institutions that tailor to individuals [versus businesses] are different.
And it kind of depends on who the smaller banks are tailored to. If we're talking about a local or regional bank that tailors to businesses or new ventures … there's always a risk associated with having money with institutions.
But, there is enough regulation, especially the liquidity requirements [enacted] by Dodd-Frank and other laws that came after the 2008 financial crisis, that allows for things to be secure. [The Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010. Among other things, it aims to ensure that most banks could absorb a financial blow. Learn more about Dodd-Frank, as well as the significant changes made to its effects in 2018, here.]
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