What went wrong at SVB

Better known as SVB, Silicon Valley Bank largely catered to California’s rich technology startup sector, which boomed in 2020 and 2021. Flush with cash, new account users, and fair prospects, the bank invested heavily and almost exclusively in long-term government bonds and securities—traditionally a secure area of investment. But they left many of these investments uninsured.

Last year, the economy turned against the technology sector as the country battled rising inflation. Due to rising interest rates from the Federal Reserve and investor doubts over the performance of digital assets like cryptocurrency, the startups that made up SVB’s user base started burning cash to stay afloat. Worse still, interest rates brought down the value of SVB’s bond position. With fewer depositors and devalued assets, SVB found itself poorly situated to handle a high volume of withdrawals.

They didn’t have cash to hand out. And their customers knew it.

The run

Last week, the bank announced the sale of a portion of its security position at a significant loss. The announcement warned that the company needed to raise more than $2 billion as soon as possible to continue operation. This sent investors, depositors, and advisers into a tailspin. On Thursday, SVB account holders rushed to empty a collective $42 billion from their bank accounts. Compounding the panic, many accounts held more than the $250,000 that the Federal Deposit Insurance Corp. guarantees, exposing customers to potentially wide-reaching losses.

In the event of a bank failure, the FDIC is tasked with protecting customers—usually by securing a buyer for that bank that will assume the organization’s obligations or by taking on the burden itself—by seizing the remaining assets, and closing the bank’s services. The FDIC seized SVB on March 10. But the panic spread. Days later, Signature Bank in New York also closed its doors in a similar situation. Like SVB, Signature Bank catered to companies with digitally based services—in particular those with cryptocurrency operations. It had also lent an undisclosed amount to SVB.

Barney Frank, a former congressman and Signature Bank board member, told The Wall Street Journal that the bank hadn’t experienced any operational challenges until SVB went under.

Why did the government step in?

In a joint statement, the FDIC and the Treasury Department said they would protect accounts with more than $250,000 in deposits in a way that wouldn’t put the burden on taxpayers.

The Treasury Department hastily convened a Zoom call with members of Congress on Sunday night to describe its plan to stop the run.

Congress’ first mission was to start calming down constituents.

“This was the first Twitter-fueled bank run,” House Financial Services Committee Chairman Patrick McHenry,R-N.C., said. “I have confidence in our financial regulators and the protections already in place to ensure the safety and soundness of our financial system.”

Because SVB’s client base is largely confined to tech startups and venture capitalists, most Americans keeping their money in major banks don’t need to panic. Freshmen lawmakers like Rep. Jeff Jackson, also of North Carolina, hurried to tamp down the fears. In a trending video on TikTok, Jackson told viewers, “Right now, every step being taken has one purpose: to make sure this domino effect ends now.”

First Republic Bank in San Francisco also has a large amount of uninsured deposits above the $250,000 limit. On Wednesday, its credit ratings tanked as the Dow Jones Industrial Average also fell roughly 280 points. On Thursday, a coalition of 11 banks set up an emergency rescue fund to give First Republic a $30 billion lifeline in case it’s the next to fall.

To regulate or not to regulate

Democrats blame the situation on poor bank management and weak government oversight. The 2010 Dodd-Frank Act put banks with $50 billion or more in assets under Federal Reserve oversight. Federal regulators would periodically perform “stress tests” to ensure a bank can weather unexpected situations. In 2018, Trump signed bipartisan legislation to raise the threshold to $250 billion in assets. He said this would help small and mid-sized banks function better. SVB had just over $200 billion as of 2022.

Democratic Sen. Elizabeth Warren of Massachusetts and Rep. Katie Porter of California this week introduced the Secure Viable Banking Act to restore the asset threshold to $50 billion. The bill is unlikely to pass the Republican-controlled House.

But it’s not guaranteed that Dodd-Frank provisions would have prevented this run or that stress tests would have uncovered SVB’s vulnerabilities. Republicans say the blame lies solely with management. Some, including Florida Gov. Ron DeSantis and U.S. Rep. Marjorie Taylor Greene of Georgia, have said the California-based bank focused too much on “woke” hiring practices and emphasized diversity instead of quality. While SVB has a “Diversity, Equity, and Inclusion” section on its webpage, most of its total workforce, senior leadership, and board were white and male as of 2022. Federal regulators have removed all senior leadership.

The Securities and Exchange Commission and the Justice Department launched investigations into SVB’s leadership. On Wednesday, The Wall Street Journal reported the Federal Reserve is opening a probe and is due to deliver a report by May 1. Congress members particularly want to know about any stock trades that executives made in the weeks leading up to the run.