Silicon Valley Bank Becomes Biggest US Bank to Fail Since 2008

With $209 billion in assets and $175.4 billion in deposits, Silicon Valley Bank (SVB) became the biggest U.S. bank to fail since the 2008 financial crisis when it was shut down by U.S. regulators this Friday (10 ).

The Federal Deposit Insurance Corporation (FDIC) took over the company controlled by SVB Financial Group as a way to protect customers. The agency, however, did not announce a buyer for the creditor’s assets, which often happens when there is an orderly liquidation of banks.

SVB’s rapid meltdown began last Wednesday, when the company announced a loss of nearly $2 billion as it tried to raise capital to deal with outflows of deposits. The bank was notable for its focus on start-ups in Silicon Valley, which are facing difficulties related to the increase in credit, in the face of rising interest rates.

The last bank under FDIC supervision to fail was Almena State Bank, in October 2020. It is unclear how many clients held deposits above the $250,000 covered by the agency’s insurance.

Risk to the financial system?

US Treasury Secretary Janet Yellen said she was monitoring the Silicon Valley Bank crisis, as well as developments at several other banks. “There are recent developments that concern some banks that I am monitoring very carefully and when banks suffer financial losses, it is and should be cause for concern,” Yellen told a US Congressional hearing.

Former US Treasury Secretary Larry Summers sees little risk that the SVB crisis will spread throughout the US banking system, as long as all deposits are fully returned to customers.

In an interview with Bloomberg TV, Summers explained that the California-based bank was hard hit by difficulties in the venture capital sector and in the liquidity of North American startups. “That’s less relevant than the fact that we’ve seen big swings in the stocks of even the biggest banks in the country,” she said.

Summers assessed that there was an exaggeration in the market reaction, but recognized that banks with assets with long-term maturity are harmed by the rise in interest rates.

Even so, the economist does not expect a situation of contagion to other companies. “I don’t see how, if it’s handled reasonably, and I have every reason to think it will be, this is going to be a source of systemic risk,” said Summers, who served under former presidents Barack Obama and Bill Clinton.

Effect of rising interest rates

The problems that SVB is going through became clearer on Thursday (9). Investors liquidated shares of the institution after it reported a loss of US$ 1.8 billion. The bank’s assets and deposits nearly doubled in 2021, large amounts of which the SVB has poured into US Treasuries and other government-sponsored debt securities.

Soon after that, however, the Federal Reserve (Fed, the American central bank) began to raise interest rates. That hit tech startups and venture capital firms served by Silicon Valley Bank, triggering a faster-than-expected decline in deposits, a move that continued to gain momentum and eventually led to the bank’s failure.

In the assessment of the UBS bank, the Silicon Valley Bank crisis sparks concerns about losses in the securities portfolio of American banks. The institution, however, does not see signs of contagion throughout the banking system. “We believe that the sector’s headwinds can be managed”, he assesses.

In recent years, many US banks have invested heavily in long-term US Treasuries, whose values ​​have dropped sharply as the Fed has raised interest rates. The FDIC had already warned recently that US creditors face $620 billion in unrealized losses associated with the bond portfolio.

According to UBS, investors are also concerned about the possibility of customers withdrawing their deposits in favor of short-term bonds, which are giving better returns. The Swiss bank assesses that the SVB scenario reinforces the negative outlook for the financial sector.

The institution also draws attention to the risk that the framework exacerbates caution in stock markets. However, UBS recalls that, since the 2008 financial crisis, banks are subject to stricter liquidity requirements.

These companies can even take big losses if there is a flight of deposits. “But these outflows can also be contained by raising deposit rates, although this reduces earnings”, he points out.