So, there’s been some big news in the banking world. First, Silicon Valley Bank, which had a lot of high-profile tech investors as clients, collapsed on Friday. Federal regulators have taken over the bank since then. It’s actually the largest U.S. bank to fail since the 2008 financial crisis. Then, on Sunday, regulators started worrying about New York’s Signature Bank. This bank had a lot of money tied up in the unpredictable cryptocurrency market.
Both Silicon Valley Bank and Signature Bank are under the Federal Deposit Insurance Corporation (FDIC) control. This happened after Silicon Valley Bank experienced a run on the bank last week, with people withdrawing billions of dollars in deposits.
The different business model of this bank
Do you know how Silicon Valley Bank wasn’t really a name you’d hear outside of Silicon Valley and the tech industry? Well, that’s because their clients were mainly venture capital firms, startups, and wealthy tech employees. They were in the game for around forty years and even managed to compete with big financial institutions. But in the end, SVB collapsed in just a few days.
Apparently, around 90% of SVB’s accounts had over $250,000 in deposits, which is higher than most banks. This means most of their deposits weren’t backed by government insurance, according to a report. Also, experts pointed out that SVB’s business model was more like a local bank from the 1800s or 1900s, focusing on deposits and local customers, while bigger banks had more diverse funding sources and customers.
In 2020, SVB’s deposits surged, but unfortunately, they invested those extra billions in long-term Treasury bonds just as the Federal Reserve raised interest rates. This led to a decline in the value of government bonds, and more depositors withdrew their money. Last week, SVB announced a loss of $1.8 billion from selling some of its bond holdings, leading to a run on the bank. Federal regulators ended up taking control of the bank last Friday.
