Saturday, May 18, 2024

Today The U.S. Had Its Second-largest Bank Failure In History

UPDATE: See this Twitter thread started by this tweet on how devastating this could be startups in general and how this bank betted on interest rates never rising.

The U.S. had its largest bank failure since the Great Recession and the second-largest bank failure in American history today. Silicon Valley Bank was closed by California regulators and the Federal Deposit Insurance Corporation (FDIC) was appointed as the receiver.

The bank’s collapse has left many tech companies, which were the bank’s main clientele, without a way to conduct business or pay employees. The FDIC says that all insured deposits will be available to the bank’s customers no later than Monday. Usually, the FDIC moves very quickly to sell failed banks’ assets and a sale could be announced as soon as this weekend.

Reuters reports that a lot of tech companies and startups could be really hurt by this closure:

But 89% of the bank’s $175 billion in deposits were uninsured as the end of 2022, according to the FDIC, and their fate remains to be determined.

Companies such as video game maker Roblox Corp RBLX.N and streaming device maker Roku Inc (ROKU.O) said they had hundreds of millions of deposits at the bank. Roku said its deposits with SVB were largely uninsured, sending its shares down 10% in extended trading.

Technology workers whose paychecks relied on the bank were also worried about getting their wages on Friday. An SVB branch in San Francisco showed a note taped to the door telling clients to call a toll-free telephone number.

Normally, the FDIC insures just $250,000 of a bank deposit. That is more than enough coverage for the vast majority of Americans. However, this leaves many commercial customers up a creek if a bank fails, which has not happened since 2020. Predictably, this has led some to call for the FDIC to cover all deposits at SVB.

One thing that we have largely abandoned as a nation since the Great Recession is allowing businesses and wealthy people to fail. These companies who deposited more than $250,000 in SVB knew there was always the risk that they could take a bath if the bank failed. Refusing to allow businesses to fail is simply socialism for the rich and chokes off the ability for better competitors to replace them.

Why did SVB collapse? CNBC has an excellent article detailing the collapse of the bank, but I’ll give you a quick summary of what happened. Basically, Silicon Valley tech companies and venture capitalists made a bank run on Thursday in response to filing on Wednesday that the bank needed to raise $2.25 billion to cover its balance sheet. The reason why the bank had to raise money was due to dislocations caused by higher interest rates.

Will this be the first of a series of bank failures caused by the Federal Reserve’s raising of interest rates? It’s too early to tell but financial analysts are expecting bank stocks to get hammered even more in next week’s stock market trading.

Although this was the first bank failure since 2020, this was not the only bank to close this week. On Wednesday, Silvergate Capital, whose clientele was largely in the crypto industry, announced it was closing and liquidating all assets. All of that bank’s depositors are expected to be repaid in full.