On March 10, Silicon Valley Bank (SVB) fell into a liquidity crisis, ending its 40-year run in just 48 hours. Since SVB had $2 billion in unknown losses in the treasury portfolio, the bank was forced to raise capital but entered into a bank run when customers took out deposits in response to higher rates. All banks have assets and liabilities. Banks make money from loans and bonds and have liabilities through deposits. Because the value of bonds dropped, SVB’s liabilities were greater than its assets. In an inverse relationship, the value of bonds decline as interest rates rise. In consequence, the nation’s 16th largest bank failed. Along with SVB, Credit Suisse was another bank that fell victim to this crisis when share prices began to plunge following the demise of SVB. On March 19, Credit Suisse was bought by Swiss Investment bank UBS (Union Bank of Switzerland) for $3.2 billion.  

As of now, the Federal Reserve (Fed) is fighting inflation but is destroying the banking industry because of the bond portfolio. The Federal Reserve is the nation’s central bank that “provides a safe, flexible and stable monetary and financial system,” according to its website. The Federal Reserve, created during the Great Depression, is tasked with monetary policy focusing on taming inflation. Inflation in simple terms is the rate of increase in prices over a period of time in financial markets. The Fed can control inflation by increasing interest rates and controlling the nation’s money supply. During the pandemic, Congress spent a lot of money on Covid related policies and increased the money supply in circulation. An example of this was the $1,400 Covid relief checks given to “single people making less than $75,000, heads of household making less than $112,500 and married couples filing jointly making less than $150,000 qualify for stimulus checks”, according to the White House. Since Congress handed out all of this money, the national banking system had a lot of money in deposits so a number of banks bought treasuries, which are bonds where the government promises to pay you an x amount of dollars plus interest. However, the value of a bond has an inverse relationship with treasuries: when interest rates rise, the value of a bond goes down. In summary, Congress increased the nation’s money supply, banks took on too many deposits and the Fed bought US treasuries to make money off of deposits, but banks failed as the value of the bond dropped.

Silicon Valley Bank headquarters in Santa Clara, Calif. PHOTO:  BRITTANY HOSEA-SMALL/REUTERS

Silicon Valley Bank’s practices were on the Federal Reserve’s radar for more than a year. The Fed noticed that the bank did not have enough cash on hand in case of a crisis. According to the New York Times, “By early 2023, Silicon Valley Bank was in what the Fed calls a “horizontal review,” an assessment meant to gauge the strength of risk management. That checkup identified additional deficiencies — but at that point, the bank’s days were numbered.”  SVB also held a large amount of debt that declined in market value due to the Federal Reserve increasing interest rates to combat inflation. With the fall of SVB, the “Federal Reserve raised interest rates by a quarter of a point in the middle of March in an attempt to fight stubbornly high inflation while addressing risks to financial stability,” according to CNN. The benchmark of interest rates was raised from 4.75 to 5 percent, and the Fed’s response was that “the U.S. banking system is sound and resilient”. 

What is inflation supposed to be at? Two percent is supposed to be a comfortable standard for inflation, low enough for consumer relief but relaxed enough for the economy to thrive, according to a Fed doctrine settled years ago. 

The Federal Deposit Insurance Corporation (FDIC), seized SVB’s assets, making it the country’s largest bank failure since the 2008 financial crisis. The FDIC insures deposits only up to $250,000. About 98 percent of SVB’s deposits were uninsured by the FDIC, and the bank itself did not have enough money to pay back its customers. According to the New York Times, the FDIC renamed Silicon Valley Bank to Silicon Valley Bridge Bank and made them a deal. The FDIC purchased about $72 billion in loans, at a discount of $16.5 billion, and would transfer all the bank’s deposits which were worth $56 billion. About $90 billion of SVB’s securities and other assets remained in the control of the FDIC and were not included in the deal. First Citizens Bank, the nation’s 30th largest bank, acquired SVB from the FDIC. First Citizens is based in Raleigh, N.C., and was founded in 1898. “We have partnered with the F.D.I.C. to successfully complete more F.D.I.C.-assisted transactions since 2009 than any other bank, and we appreciate the confidence the F.D.I.C. has placed in us once again,” Frank B. Holding Jr., the chief executive of First Citizens, said in a statement. 

Similar to Silicon Valley’s demise, Signature Bank collapsed on March 12 due to most of their customers having holdings above $250,000 that were not insured. Signature Bank, a 24-year-old institution, became one of a few banks to allow cryptocurrency deposits. According to the New York Times, more than $79 billion of Signature Bank’s $88 billion deposits were uninsured at the end of 2022. Due to allowing cryptocurrency, its digital asset-related client deposits were at $16.52 billion. According to CNN, Flagstar Bank, a subsidiary of New York Community Bank, bought a considerable amount of Signiture’s deposits and $38.4 billion worth of the company’s assets.

“There will be real and lasting economic repercussions from this, even if all the dust settles well,” said Jay Bryson, chief economist at Wells Fargo. “I would raise the probability of a recession given what’s happened” As inflation continues to rise, the US could enter into a season of economic turmoil. 

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