Commentary
Silicon Valley Bank (SVB), the country’s sixteenth-largest bank with $209 billion in assets, failed on Friday in one of the most shocking developments to hit the banking sector since the global financial crisis fifteen years ago. SVB’s claim to fame was its deep connection to the venture capital and tech community of Silicon Valley, boasting that “44% of U.S. venture-backed technology and health care IPOs … bank with SVB.” Well, not anymore.
Is the broader banking sector at risk of contagion? This is the issue we need to look at as soon as possible.
SVB’s demise came suddenly (pdf). On Wednesday, the bank announced a loss of $1.8 billion from selling “available for sale” investment securities. Its holding company announced it would raise $2.25 billion to shore up the bank’s capital. Rather than comforting investors and depositors, this surprising announcement spooked them, “causing a run on the bank.” Within a few hours, depositors withdrew some $42 billion in cash, approximately 25 percent of total deposits, leaving the bank with a negative cash balance approaching $1 billion by the end of Thursday. Unable to shore up this shortfall overnight, the initially illiquid and then insolvent bank failed. California’s Commissioner of Financial Protection and Innovation took over the bank and appointed the FDIC as a receiver….