In the precarious world of finance, the safety and security of one’s deposits are believed to be sacrosanct. Such was the case for the clients of Silicon Valley Bank (SVB), who were assured by the bank’s CEO that their money was safe and secure. Not long after, panic ensued, and calls rang out among Silicon Valley customers to pull any and all deposits held in SVB. The problem? SVB didn’t have the money to meet the staggering demand for withdrawals. This firestorm is compounded by the fact that another bank, Signature Bank, was just taken over by regulators, while Silvergate Capital shut down.

Closing Down Shop

Silicon Valley Bank is the California subsidiary of SVB Financial Group (ticker symbol SIVB), a bank primarily tailored to venture capitalists serving the tech hub that is the greater Bay Area in California. Nearly half of the venture-backed startups banked with Silicon Valley. But the bank’s fortunes took an obvious dramatic turn for the worst. To put it in perspective, prior to the run on the bank, SIVB’s stock plummeted from a previous close of ‎$267.83 on March 8th to around a lowly $35 on the morning of March 10th.

As the crisis deepened, the FDIC, the Federal Deposit Insurance Corporation, issued a press release saying that, in hopes of stabilizing the situation, the government corporation had set up a receiver bank to assist in winding down the troubled Silicon Valley Bank. As the name somewhat suggests, receiver banks review and process a company’s debts and determine how to pay outstanding obligations, usually by liquidating assets or finding a buyer for the beleaguered company.

At that point, SVB was effectively closed for regular business. By most accounts, SVB’s collapse was the 2nd largest failure in U.S. history. This stoppage came on the heels of Silvergate Capital announcing it was shutting down, which it did on March 8th and preceded the March 12th closure of Signature Bank.

The FDIC normally insures bank deposits up to $250,000, which is a good sum for the average person. However, for small businesses and intermediaries that dole out money to companies, $250,000 won’t cut it. As noted by Bobby Allyn’s article titled Silicon Valley Bank failure could wipe out ‘a whole generation of startups’, “as little as about 4% of the bank’s deposits are below $250,000, meaning the vast bulk of depositors has money that exceeds standard federal insurance.”

However, in a joint statement released by Treasury Secretary Janet Yellen, Federal Reserve Board Chair Jerome Powell, and FDIC Chairman Martin Gruenberg, the federal government will cover the depositors of SVB and Signature Bank. This amount includes deposits not previously covered by insurance, though shareholders and unsecured debt holders will be caught “holding the bag.”

It’s Like ‘A Wonderful Life, Not Like The Big Short

While most media paid attention to Silicon Valley Bank, Silvergate Capital also received the kiss of death. Though, the comparatively little coverage of Silvergate is understandable, as the size of Silicon Valley’s balance sheet dwarfed Silvergate. Still, it’s worthwhile to talk about these two banks together because of the similarity in their downfall.

How did all this happen? To use a movie analogy, what occurred is closer to the scenario in the Christmas Classic It’s A Wonderful Life (1946) and differed from what was depicted in The Big Short (2015).

If you don’t remember It’s A Wonderful Life, panic swept through the community in the small town of Bedford Falls as customers of the Bailey Building and Loan Association rushed to withdraw their holdings. As word spread, people clamored to get their hands on their hard-earned money. The crowds grew larger and more aggressive as the bank’s reserves dwindled until the bank didn’t have enough money.

There are a multitude of complex factors in the real-life version of what happened to this trio of banks, but the following is the gist.

To fight the historic inflation the country is facing, the Federal Reserve has been raising interest rates. Higher interest rates affect many different things in the economy, including the behavior of venture capitalists, who are less likely to fund startups aggressively in a high-interest rate environment. However, of course, the startups that were already clients of places like SVB have bills to pay, so they draw from SVB—a lot. In the same position was Silvergate; they needed cash to meet client demands.

Many of Silvergate’s clients were focused on cryptocurrency services. Because of the recent loss of confidence surrounding cryptocurrencies, especially in the wake of the FTX debacle, depositors shifted their money away from digital assets. The bank began offloading its securities back in 2022.

As is typical, SVB and Silvergate, like many banks, put much of the money it gets from clients into U.S Treasury bonds. Bonds are generally considered safe investments, but the price of fixed-rate bonds falls when interest rates increase. That wasn’t a problem when SVB bought the bonds when the cost was low. But given the current interest rates, the bonds are not very valuable in the open market.

In an ideal world, a bank would have the option to simply hold onto the bonds until they mature, upon which the banks get the face value of the bond—but they need cash. In order to have enough money on hand to cover withdrawals, SVB sold about $21 billion of its bonds at a loss of $1.8 billion.

SVB signaled its intent to offer $1.25 billion of its stock, but instead of stabilizing the situation, it panicked depositors, who began their run to withdraw all their money. This, in turn, scarred depositors of Signature Bank, which became the third largest bank collapse in U.S history.

Silvergate, for now, is in control of its assets. It will liquidate and wind down voluntarily, while SVB and Signature Bank wind down with the FDIC.

What Happens From Here

The prevailing concern is contagion, the term used to describe the fallout of one financial crisis leading to the cause of another problem. The fear now is that the failure of these banks could lead to a domino effect, causing more banks to fail. The 1997 Asian Financial Crisis, which erupted in the aftermath of the collapse of the Thai baht sparking fears across other Asian countries, serves as a stark reminder of this genuine danger. With popular commentaries stoking fears of another looming catastrophe in the aftermath of SVB, it’s natural to wonder whether we’re standing on the precipice of another calamity.

At present, it’s hard to say what the result will be. While it’s impossible to predict the ultimate outcome, it’s crucial to recognize that the present situation differs significantly from the 2008 Financial Crisis.

As I mentioned previously, we are less so in the realm of The Big Short and more so in a It’s Wonderful Life scenario. Unlike the behemoth investment banks at the heart of the 2008 crisis, the current institutions under scrutiny—SVB, Silvergate Capital, and Signature Bank have smaller footprints and tailored clientele. SVB was a regional bank, not an investment bank with a nationwide operation. As such, the potential fallout, while undeniably consequential for the tech sector, venture capital in California, and cryptocurrency exchanges, is considerably more contained than the systemic risks posed by the 2008 financial giants.

The government doesn’t seem to be pondering a 2008-stylized bailout anytime soon. But it does seem to be wading through new territory. As Emily Stewart wrote, “We’ve entered a complicated new era of bank bailouts.” On March 12th, the Federal Reserve Board announced a new Bank Term Funding Program that offers loans to depository institutions in exchange for pledging collateral.

What remains to be seen is if banking panic satiates the Federal Reserve’s appetite for higher interest rates. Inflation continues to rear its ugly head, but Powell has shrugged off criticism denouncing the Fed’s interest rate play as overly aggressive. But will this be the breaking point? Will the Fed stop its march to curb inflation? One can’t help but wonder.