Silicon Valley Bank biggest US lender to fail since 2008 crisis: Finance expert explains impact
Houston (The Conversation): Silicon Valley Bank, which catered to the tech industry for three decades, collapsed on March 10, 2023, after the Santa Clara, California-based lender suffered from an old-fashioned bank run. State regulators seized the bank and made the Federal Deposit Insurance Corporation its receiver.
SVB, as it's known, was the biggest U.S. lender to fail since the 2008 global financial crisis and the second-biggest ever.
We asked William Chittenden, associate professor of finance at Texas State University, to explain what happened and whether Americans should be worried about the safety of their financial system.
Why did Silicon Valley Bank collapse so suddenly?
The short answer is that SVB did not have enough cash to pay depositors so the regulators closed the bank.
The longer answer begins during in the pandemic, when SVB and many other banks were raking in more deposits than they could lend out to borrowers. In 2021, deposits at SVB doubled.
But they had to do something with all that money. So, what they could not lend out, they invested in ultra-safe U.S. Treasury securities. The problem is the rapid increase in interest rates in 2022 and 2023 caused the value of these securities to plunge. A characteristic of bonds and similar securities is that when yields or interest rates go up, prices go down, and vice versa.
The bank recently said it took a US 1.8 billion hit on the sale of some of those securities and they were unable to raise capital to offset the loss as their stock began dropping. That prompted prominent venture capital firms to advise the companies they invest in to pull their business from Silicon Valley Bank. This had a snowball effect that led a growing number of SVB depositors to withdraw their money too.
The investment losses, coupled with the withdrawals, were so large that regulators had no choice but to step in to shut the bank down to protect depositors.
Are the deposits now safe?
From a practical perspective, the FDIC is now running the bank.
It is typical for the FDIC to shut a bank down on a Friday and have the bank reopen the following Monday. In this case, the FDIC has already announced that the bank will reopen on March 13 as the Deposit Insurance National Bank of Santa Clara.
At the end of 2022, SVB had 175.4 billion in deposits. It's not clear how much of those deposits remain with the bank and how much of those are insured and 100% safe.
For depositors with 250,000 or less in cash at SVB, the FDIC said that customers will have access to all of their money when the bank reopens.
For those with uninsured deposits at SVB basically anything above the FDIC limit of 250,000 they may or may not receive back the rest of their money. These depositors will be given a "Receiver's Certificate" by the FDIC for the uninsured amount of their deposits. The FDIC has already said it will pay some of the uninsured deposits by next week, with additional payments possible as the regulator liquidates SVB's assets. But if SVB's investments have to be sold at a significant loss, uninsured depositors may not get any additional payment.
What was the last US bank to fail?
Prior to the failure of SVB, the most recent bank failures occurred in October 2020, when both Almena State Bank in Kansas and First City Bank of Florida were taken over by the FDIC.
Both of these banks were relatively small with about 200 million in deposits combined.
SVB was the biggest bank to fail since September 2008, when Washington Mutual failed with 307 billion in assets. WaMu fell in the wake of investment bank Lehman Brothers' collapse, which nearly took down the global financial system.
On the whole, U.S. bank failures aren't all that common. For example, there were none in 2021 and 2022.
Is there any risk that more banks might fail?
At the end of 2022, SVB was the 16th-largest bank in the United States with 209 billion in assets.
That sounds like a lot and it is but that's just 0.91% of all banking assets in the U.S. There is little risk that SVB's failure will spill over to other banks.
Having said that, SVB's collapse does highlight the risk that many banks have in their investment portfolios. If interest rates continue to rise, and the Federal Reserve has indicated that they will, the value of the investment portfolios of banks across the U.S. will continue to go down.
While these losses are just on paper - meaning they're not realized until the assets are sold they still can increase a bank's overall risk. How much the risk will go up will vary from bank to bank.
The good news is that most banks currently have enough capital to absorb these losses however large in part because of efforts taken by the Fed after the 2008 financial crisis to ensure financial firms can weather any storm.
So rest easy for now, the banking system is sound.
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MP HC sets up judicial commission to probe water contamination in Indore
Indore (PTI): The Indore bench of Madhya Pradesh High Court on Tuesday set up a commission of inquiry comprising a former HC judge to probe the issue of water contamination in city's Bhagirathpura, saying the matter requires probe by an independent, credible authority and "urgent judicial scrutiny".
It also directed the commission to submit an interim report after four weeks from the date of commencement of proceedings.
A division bench of Justices Vijay Kumar Shukla and Alok Awasthi constituted the commission while hearing several public interest litigations (PILs) filed simultaneously regarding the deaths of several people in Bhagirathpura due to the consumption of contaminated water.
The HC reserved the order after hearing all the parties during the day, and released it late at night.
The state government on Tuesday told the HC that the deaths of 16 people in Indore's Bhagirathpura area was possibly linked to a month-long outbreak of vomiting and diarrhoea caused by contaminated drinking water.
The government presented an audit report of 23 deaths from the current gastroenteritis epidemic in Bhagirathpura before the bench, suggesting that 16 of these fatalities may have been linked to the outbreak of vomiting and diarrhoea caused by contaminated drinking water.
The report, prepared by a committee of five experts from the city's Government Mahatma Gandhi Memorial Medical College, stated that the deaths of four people in Bhagirathpura were unrelated to the outbreak, while no conclusion could be reached regarding the cause of death of three other people in the area.
During the hearing, the high court sought to know from the state government the scientific basis behind its report.
The division bench also expressed surprise at the state government's use of the term "verbal autopsy" in relation to the report, sarcastically stating that it had heard the term for the first time.
The HC expressed concern over the Bhagirathpura case, stating that the situation was "alarming," and noted that cases of people falling ill due to contaminated drinking water have also been reported in Mhow, near Indore.
In its order, the HC said the serious issue concerning contamination of the drinking water supply in Bhagirathpura area allegedly resulted in widespread health hazards to residents, including children and elderly persons.
According to the petitioners and media reports, death toll is about 30 till today, but the report depicts only 16 without any basis or record, it said.
It is averred that sewage mixing, leakage in the pipeline, and failure of civic authorities to maintain potable water standards have led to the outbreak of water-borne diseases. Photographs, medical reports, and complaints submitted to the authorities prima facie indicate a matter requiring urgent judicial scrutiny, the HC said.
"Considering the gravity of the allegation and affecting the right to life under Article 21 of the Constitution of India and the need for an independent fact-finding exercise, the Court is of the opinion that the matter requires investigation by an independent, credible authority," it said.
"Accordingly, we appoint Justice Sushil Kumar Gupta, former judge of the Madhya Pradesh High Court, a one-man commission of inquiry into the issues relating to water contamination in Bhagirathpura, Indore, and its impact on other areas of the city," the HC added.
As per the order, the commission shall inquire into and submit a report on the cause of contamination -- whether the drinking water supplied to Bhagirathpura was contaminated; and the source and nature of contamination (sewage ingress, industrial discharge, pipeline damage etc).
The panel will also probe the number of actual deaths of affected residents on account of contaminated water; find out the nature of disease reported and adequacy of medical response and preventive measures; suggest immediate steps required to ensure safe drinking water as well as long-term infrastructural and monitoring reforms.
It will also identify and fix responsibility upon the officers and officials found prima facie responsible for the Bhagirathpura water contamination incident, and suggest guidelines for compensation to affected residents, particularly vulnerable sections.
The commission shall have powers of a civil court for the purpose of summoning officials and witnesses; calling up records from the government department, hospitals, laboratories and civic bodies; ordering water quality testing through accredited laboratories; conducting spot inspections.
All state authorities involving district administration, Indore Municipal Corporation, public health engineering department and Madhya Pradesh Pollution Control Board shall extend full co-operation and provide records as sought by the commission, it said.
The state government shall provide office space, staff, and logistical support to the commission, it said.
During the hearing in the day, the state government also presented a status report to the court in this matter.
According to reports, a total of 454 patients were admitted to local hospitals during the vomiting and diarrhea outbreak, of whom 441 have been discharged after treatment, and 11 are currently hospitalised.
According to officials, due to a leak in the municipal drinking water pipeline in Bhagirathpura, sewage from a toilet was also mixed in the water.
