The United States is facing yet another economic crisis, a refrain that has become far too common ever since the COVID-19 pandemic in 2020. The Silicon Valley Bank, the 16th largest bank in the nation that mainly funds tech startups and venture capital firms with a total of $209 billion in deposits, was shut down by the Federal Deposit Insurance Commission (FDIC) on Friday, March 10, 2023. Due to the magnitude of the impact it has had on many famous rising corporations on both coasts of the US, it has become the largest bank to fail since Washington Mutual’s collapse during the 2008 financial crisis.
The bank’s website claims that, since its founding in 1982, it has provided banking services to almost half of the United States’ venture capital-backed technology companies and to more than 2,500 venture capital firms. Through a financial practice called fractional reserve banking, the Silicon Valley Bank kept a small chunk of its deposits in cash and bought long-term US Treasury bonds which are, essentially, stocks for the government. These investments generally promised steady, modest returns when interest rates remained low. Due to the previously stable rate of return of these bonds, in early 2022, SVB bought a massive amount for a total of $100 billion over a period of 3.6 years.
However, the bank failed to account for the economy that was bloated with money due to pandemic stimulus policies when making their decision. Immediately after the bank made their purchase, the Federal Reserve seeked to combat rapid inflation and raised interest rates swiftly. This also meant that the government bonds had an increased interest rate, leading to the bonds rapidly losing value.
Once SVB publicly announced that they were undergoing these tough circumstances and requested independent investors to help them brave the situation on Wednesday, March 8, depositors suspected that this instance reflected a larger issue in the economy; they lost faith in the system and began withdrawing their money at an unsustainable pace while the bank was facing a loss and only had a minimal amount of money on hand while the rest was invested in the long-term bonds mentioned previously.
The FDIC, a government corporation established in 1933 to provide consumer deposit insurance to banks following the bank runs of the Great Depression, came to the decision to shut the 40-year-old institution down just a few days later, effectively freezing all the deposits of the bank, amounting to $209 billion. As its mission statement reads, the FDIC is responsible for maintaining “stability and public confidence in the nation’s financial system.” However, due to its rules and regulations, it is only able to compensate deposits of $250,000 per depositor in the bank. When looking at the entire situation, the FDIC can only insure a mere 2.7% of all deposits at SVB.
To further indicate the gravely distressing state of our current economy and financial system and its future expectations, on Sunday, March 12, Signature Bank, founded in 1999 and specializing in real estate and law firm lending as well as cryptocurrency deposits in recent years, was officially recognized as defunct by the FDIC due to a similar situation to SVB. As a bank who served the Former U.S. President Donald Trump as a client until 2021 and was worth a total of $110 billion in deposits during the time of its closing, it has sent shockwaves throughout the already-weakened economy and, in partnership with the SVB’s closing, caused stocks to plummet. As many top economists have suggested, these two bank collapses are simply a precursor to a modern rendition of the “slow rolling crisis”, one that will affect global markets and trade for decades to come. The effects are already clear on the international stage; the Swiss bank, Credit Suisse, has already been forced to borrow up to $54 billion from the Swiss National Bank as of Wednesday, March 15, and this figure is expected to rise dramatically in the coming days for both this “battered lender”, as the New York Times puts it, as well as many other banks worldwide.
“The knee-jerk reaction is further evidence of just how panicked investors are about the stability of the global financial system after the collapse of Silicon Valley Bank last week,” continued the New York Times analysis. “The bank’s rapid demise woke up investors and depositors to potential risks that could threaten other banks, both in the United States and globally, and has prompted a broad-based sell-off in bank stocks and financial markets.”
Sources:
KRISHNA MANO
Hello! My name is Krishna Mano and I am a sophomore at City High School. This is my fourth year writing for The City Voice and second year as an editor. Apart from the newspaper, I am part of the Speech and Debate team, President of the 10th Grade Student Council, and Treasurer of the NHS. Outside of school, I enjoy playing the violin, reading, skiing, and paddleboarding. If you have any questions about my articles, please contact me at krishna.mano.thecityvoice@gmail.com.
-
KRISHNA MANO#molongui-disabled-link
-
KRISHNA MANO#molongui-disabled-link
-
KRISHNA MANO#molongui-disabled-link
-
KRISHNA MANO#molongui-disabled-link
