The second-largest bank collapse in American history took place over the weekend when Silicon Valley Bank failed spectacularly. Then, only hours later, the third-largest bank collapse in American history occurred when Signature Bank went down on Sunday. What is going on out there, and are we on the brink of another financial crisis?
The Treasury Secretary, Janet Yellen, told reporters over the weekend that the Federal government doesn’t plan to bail out Silicon Valley Bank. Instead, the FDIC will cover depositors’ money, but shareholders will be stuck holding the massive losses as the bank ceases to exist due to bankruptcy.
What Happened?
In plain terms, SVB over-invested in mortgages and lost the support of its biggest backers. The very tech-focused bank relied heavily on investment from startups and tech companies. When a number of these businesses decided to pull their finances out of SVB, it led to the bank’s complete collapse.
The Federal Government insures bank accounts for DSIC complaint institutions, of which SVB was one. Treasurer Yellen was adamant on Sunday that none of the costs for covering depositors’ money will be held by taxpayers. Instead, the Federal government will recoup its costs by holding a special assessment of SVB to find its remaining valuable assets.
2008 All Over Again?
Those who lived through the financial crisis in 2008 will remember how things started to look dire right when Washington Mutual sank and dragged the subprime mortgage industry down with it. Experts have been quick to retort that the SVB situation isn’t like 2008.
“Yes there are a couple [of] other banks that have some tech concentration that pose some risk, but SVB was extreme in its courting of large accounts and perks. And they will try to tell you this is a risk to the entire system but it isn’t. The big banks are incredibly well capitalized and the market even told you that on Friday with JP Morgan, Citi, Bank of America, and Wells Fargo all having uneventful days in the market,” one anonymous analyst told reporters.
Signature Bank Goes Down
Signature Bank also collapsed Sunday, bringing the number of US bank failures to two in two days. US regulators say the steps they’ve taken “will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.”
