The tech financier Silicon Valley Bank (SVB), which collapsed on Friday, will not be rescued in the same way as banks were kept afloat by governments during the credit crisis. That said US Treasury Secretary Janet Yellen in a TV interview Sunday. “Shareholders and owners of large systemic banks were saved during the financial crisis. We’re certainly not considering doing that again now. Since then, reforms have also been made for this,” says Yellen.
She said the ministry is working closely with banking regulators. “We are very aware of the problems account holders will have. Many of them are small businesses that employ people across the country.”
The fall of SVB was the largest since the financial crisis of 2008. The sixteenth largest bank in the US published a press release on Thursday that it had to raise money to strengthen its capital base. Friday afternoon American time, the regulator FDIC took over power at the bank. SVB’s problems sent banking shares worldwide down sharply.
Bank run due to double problem
SVB had run into problems from two sides. On the one hand, the bank had very unilaterally invested its capital, which had grown strongly in recent years, in long-term bonds with low interest rates. Due to the current high interest rates, those bonds have become worth much less. On the other hand, many customers have withdrawn their deposits in recent months. The bank focuses on start-ups and their financiers in the tech sector, which has run into serious problems in recent months. To pay for that, money had to be released by selling bonds. The sale of $21 billion of the aforementioned bonds resulted in a loss of $1.8 billion.
Read alsoThe problems of this small tech bank shocked the entire banking world
The press release from SVB about the share issue and the loss on the bonds appears to have started a huge bank run. $42 billion in deposits were withdrawn by clients on Friday, according to the FDIC, a quarter of the total SVB held from clients.
The question now is: how exemplary is SVB for other banks? The many other smaller banks in the US are viewed with suspicion. How safely have they tucked away the savings entrusted to them?
The US banking system is more secure than it was during the 2008 crisis
Janet Yellen Minister of Finance
Yellen tried to reassure Americans on Sunday: “The US banking system is more secure, better capitalized and more resilient than it was during the 2008 global financial crisis, given the new controls and capital requirements that have been put in place since then.” The question is whether consumers want to take the risk that their local bank still resembles SVB. In the coming days, many Americans may try to transfer their savings to one of the country’s major banks, which are still seen as too big too fail. The question is whether those banks then have sufficient liquid assets to meet the demand.
Monday will also be a very uncertain day for SVB customers. Under the US Deposit Guarantee Scheme, up to $250,000 is guaranteed – customers can request that amount from the FDIC on Monday. However, almost all of SVB’s tech customers had parked more than that amount with SVB.
Of the USD 173 billion in savings that SVB had at the end of 2022, USD 152 billion was not covered by the deposit guarantee scheme. That money is now tied up in the bankrupt estate of SVB. Whether and when customers can access that money depends on how SVB is currently being settled. If a buyer is found after all, easy access is possible. If the FDIC does not find an interested party, SVB’s assets must all be liquidated. That can take years and be associated with losses.
For SVB customers, the question is whether they can pay their staff on Monday. Many companies have already been approached by debt buyers who offered 60 to 80 cents on the dollar to take over the claim against SVB.
More than 3,500 tech executives whose company banked with SVB, representing some 220,000 employees, this weekend asked Yellen to reimburse the deposits in full “otherwise 100,000 jobs would be at risk.” The question is whether the Biden government considers this image justifiable: rescuing ‘tech millionaires’, even if they are ‘savers’ and not owners of the bank.
It remains to be seen in the coming days how contagious the fall of SVB is – and whether the major dips in the stock prices of the banking sector on Friday were therefore justified. But if it remains only with a failure of SVB, there is still a major victim: the start-up sector. Worldwide, SVB is – or was – one of the few banks that was prepared to provide risky start-ups with money and services. For Google’s future competitor, Tiktok or Facebook, an important ally will therefore be lost if SVB is unable to make a restart.