Silicon Valley Bank

Silicon Valley Bank was the home of tech startups, the 16th largest lender in America, and held around 200 billion dollars in assets. It collapsed on March 10th, the biggest lender to do so since the global financial crisis. Many of its deposits were larger than the two hundred and fifty thousand dollars that is covered by federal insurance. Regulators stepped in to mitigate the damage.

Every American should feel confident that their deposits will be there if and when they need them, but it has exposed some serious flaws in America's banking architecture. Our Wall Street correspondent explains what happened and what might happen next.

Silicon Valley Bank mostly caters to the tech industry, and over the past three years, the tech industry has been booming. They've raised a lot of money for venture capital, and they were all banking with Silicon Valley Bank. Now, all of these customers are commercial customers, and because they place large deposits with Silicon Valley Bank, that means that they are all covered by Deposit Insurance, a program that protects depositors from losses in the event that their bank fails.

So that was one problem. The other problem for Silicon Valley is that it amassed a huge pot of deposits from these tech companies over the past three years, but it was struggling to make loans to those same companies. So instead, it used those deposits and bought a lot of Treasury Securities, which is debt issued by the American government, and mortgage-backed securities as well.

And those assets were very, very sensitive to rising interest rates. So when interest rates went up, the value of all the assets that Silicon Valley Bank had bought fell sharply. So when people realized the value of its assets had fallen and that it might be insolvent, all of its customers had a real incentive to run to pull their assets from the bank as quickly as they can, and that is exactly what happened.

The treasury announced that all depositors in Silicon Valley Bank and another bank called Signature, which also failed, were going to be made whole. So even the uninsured deposits that companies had placed with Silicon Valley Bank and Signature Bank were going to be redeemable in full. That is a new intervention that the treasury has not made before in one of these bank failures.

At the same time, the Federal Reserve launched a new lending facility, which would allow banks to post good, high-quality assets like treasuries, like mortgage-backed securities, in a new facility to borrow against them at quite generous rates. And the combination of those two things was supposed to try and stop contagion from spreading across the banking system.

This episode raises two big questions about the financial system. The first is whether the regulatory apparatus that banks currently exist under is appropriate. Silicon Valley Bank and other banks of its size were exempted on a lot of the regulations put in place post-crisis, in part because it was thought that their failure wouldn't pose a systemic risk to the financial system.

But as we've seen, when there was a run on a bank as big as Silicon Valley Bank, that quickly led to fears of runs at other institutions. That suggests that there were systemic risks associated with banks of that size failing, and maybe those thresholds need to be rethought. The second big question is about whether we'll see problems elsewhere in the financial system.

You've seen financial institutions in the hottest parts of the economy, so crypto with the failure of FTX and now Tech with the failure of Silicon Valley Bank. You've seen those institutions come unstuck first as interest rates have climbed. It's not yet clear whether the full impact of interest rates has rippled through the entire financial system and revealed all the institutions that might be struggling with the consequences.

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