Recent U.S. Bank Closures Explained
The recent closures of three U.S. banks have caused concern among investors and consumers. Silvergate Bank, Silicon Valley Bank, and Signature Bank, New York, are among them. Each of these banks has faced different challenges leading to their closure.
Silvergate Bank
Silvergate Bank, known for conducting business with crypto-based companies and investors, recently shut down operations and voluntarily liquidated its assets. According to the business, it planned to repay the deposits of all its clients fully. Ultimately, Silvergate had to wind down its assets due to troubles in the sector of its clients, digital currency. The actual business model of Silvergate was not wholly at fault. For instance, one of the company’s clients was FTX, a crypto exchange company that recently collapsed due to faulty business ventures. Because crypto investors feared for the safety of their funds (rightfully so), many pulled their money out of exchanges such as FTX.
Since Silvergate was holding onto the deposits from these exchanges, they needed to withdraw their money from Silvergate to meet their clients' withdrawal requests. Unfortunately, Silvergate did not have enough money to fund its clients' withdrawals. Silvergate had to sell off its bond holdings at a loss to increase its cash position.
The issue with losing so much cash value in deposits is that banks profit from the money their clients' deposit. Rather than hold onto their clients' total deposits, banks expand their operations (in the form of loans and investments) using at least a portion of their customers' deposits. That said, when customers take exceptional amounts of cash out of a bank such as Silvergate, the bank loses a large share of the money it would be using to generate profits.
Silicon Valley Bank
Silicon Valley Bank, on the other hand, is a bank that specializes in lending to high-growth tech startups. Based on information from the bank's website, 44% of U.S. venture-backed technology and healthcare startups bank with Silicon Valley Bank. According to the FDIC, the bank had around $209 billion in assets and about $175.4 billion in customer deposits. With a balance sheet totaling hundreds of billions of dollars, the collapse of Silicon Valley Bank was massive. The bank was the largest bank failure since the financial crisis of 2008.
Problems began last year when the bank invested significant amounts of depository cash into mid-term and long-term bonds. When the bank purchased most of the bonds, interest rates were considerably low. Released in February this year, an annual report of the company's financials reveals that it held around $16 billion in U.S. Treasury securities at a weighted average interest yield of nearly 1.50%. This year, U.S. Treasury securities have yielded between 3 and 5 percent on average. Because currency U.S. bonds yield higher interest, the bonds held by Silicon Valley Bank lost a great deal of value. Unfortunately, this did not fare well for the bank, as it had to liquidate its bond holdings to return its customers' funds. Upon selling around $21 billion worth of securities at a 1.8-billion-dollar loss and later attempting to raise about 1.75 billion dollars through the common stock and depository share issuance, depositors worried about the bank's financial soundness. In response, depositors began pulling their money out of the bank in large numbers, resulting in a bank run. In turn, the bank was shut down by California regulators.
Signature Bank, New York
Signature Bank is a New York-based commercial bank servicing 40 private clients around the metropolitan New York area, Connecticut, California, Nevada, and North Carolina. Despite an announcement by Signature Bank on March 8th detailing its supposed "well-diversified financial position and limited digital-asset related deposit balances in the wake of industry developments," the bank's stock fell by over 30% in the following two days. Due to a mixture of significant stock losses, a relatively large holding of cryptocurrency deposits, and the recent falls of Silvergate and Silicon Valley Bank, many high net-worth clients withdrew their funds from the bank. On Sunday, March 12th, New York officials decided to halt the bank's operations in an effort to protect the bank's remaining depositors.
Bank Stability and Protection
While the failures of these banks may be concerning, it is important to note that all Silicon Valley Bank and Signature Bank depositors will be fully protected, even past their $250,000 insurance limit. The Federal Reserve wants to prevent any severe financial stress. Additionally, the two banks have resumed their services under temporary FDIC-operated bridge banks.
Although it can be helpful to stay cautious, it is unlikely that any extreme financial distress due to U.S. banking failures will occur. As stated by the Federal Reserve, "The Board is carefully monitoring developments in financial markets. The capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient." If you are to be wary of anything, be wary of influencers and news outlets attempting to spread fear among their audience. The Federal Reserve is working to maintain a strong and stable banking system that can service all of its clients' withdrawals.
To improve banks' liquidity and help them meet withdrawals from their depositors, the Fed is now providing additional funding to eligible depository institutions. This move is meant to ensure people receive their money when taking it out of the bank. In a joint statement, the Federal Reserve, FDIC, and Treasury officials stated that they are making decisions to protect the integrity of deposits and access to credit for both households and businesses.
Despite the protection of depositors, shareholders and certain unsecured debtholders will not be protected. Additionally, in normal circumstances, only insured depositors or those with deposits less than $250,000 would receive their full deposit in the case of a bank failure. When a bank goes down, it can have significant financial implications for its unprotected clients; therefore, bank investors and clients with uninsured funds (deposits over $250,000) should always review the financial strength of any bank they decide to place their money into. Some simple ways to gain an understanding of a bank's financial stability include checking its credit rating, ensuring it is FDIC insured, and searching the news for any red flags associated with the bank. Although more difficult and time-consuming, there are additional ways to analyze a bank's finances that may reveal more information, such as checking its liquidity ratio (a bank's ability to meet short-term financial obligations) and reviewing its financial statements.
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