Bank Failure

by Mike James

Soon after reporting a $1.8 billion loss to shareholders Silicon Valley Bank (SVB), the 16th largest bank in the United States (U.S.), experienced a run on its deposits. SVB became the largest bank to fail in the U.S. since the 2008 financial crisis. A couple days after the failure the Biden Administration promised that all depositors would have access to their money after the weekend of the collapse.

About two days after SVB collapsed a second bank, Signature Bank of New York, also collapsed and was afforded the same protection for their depositors.

The Federal Reserve also announced the creation of a lending facility for the nation’s banks, to shore them up against financial risks caused by the collapse of these two banks.

Initially the collapse of SVB appeared to be a blip on the radar. But concern grew in the next two days with major actions taken by the Federal government two days later.

Only $250,000 in depositor’s money is insured by federal law. The reason the government ended up backing all deposits at SVB and Signature is for fear of a larger “systemic” meltdown resulting if they did not.

The primary reason for SVB’s failure is unrealized losses on the bank’s government securities. As interest rates have risen over the past year the value of those securities went down.

Banks have reported about $620 billion in such paper losses by the end of last year according to the Federal Deposit Insurance Corporation (FDIC). Banks don’t usually lose that money because they hold the treasuries till they mature. But in this case SVB had to sell the treasury securities to cover withdrawals from depositors.

Other reasons for the downfall of SVB includes venture capital diminishing, a lot of uninsured depositors, and a lack of regulatory oversight.

According to David Sacks of Craft Ventures, “This could have been a very damaging effect on the start-up economy and the whole U.S. economy. These are the future companies that will keep the U.S. competitive versus China and the rest of the world.” SVB served many technology start-up companies in Silicon Valley.

Mere days after the failure of SVB and Signature talks are underway between the biggest banks in the U.S. and First Republic Bank to shore up First Republic. First Republic’s stock dropped by 60 percent within days of the SVB collapse. Credit Suisse Bank of Switzerland also showed signs of trouble prior to the Swiss National Bank shoring it up.

The failure of SVB may lead to a break in the Federal Reserve increasing interest rates to slow inflation. The continuing rate hikes might impact other banks.

I found it quite startling years ago when I first discovered that if everyone wanted to move their money out of their bank at the same time a bank could not handle that demand. This makes it clear to me that our banking system is a true house of cards. If you built a house of cards near a window in your home you better keep the window closed nearby. Someday the wind will blow and your house of cards may not survive. What we fail to realize is the bankers, regulators, governments, and investors are all human beings who will make mistakes and errors in judgment. They will open the window from time to time. We are only an open window and a gusty wind away from trouble with our banking system. The last major wind was only in 2008, so please don’t forget things are not always as they seem out there.

One of these days I suppose our luck will run out and then things can really get interesting. It is good to be reminded of the precarious nature of our lives.

In just the last month we have seen the ravages of a Turkish earthquake; war in Ukraine; too much snow and flooding in California; and now a seemingly averted run on our banks.

If we can’t count on stability in life what can we count on? You all know the answer—Jesus Christ.

Are you counting on your 401 (k) plan? Are you counting on your husband or wife? Are you counting on your health? Are you counting on your political party or a politician? Regardless of what you place your faith in you better first place your primary faith and trust in Jesus Christ (Matthew 6:33). Because only through Him are you given any sure guarantees (Romans 6:23).

Sources: “U.S. Says All Deposits at Failed Bank Will Be Available Monday,” by Jeff Stein, David J. Lynch, Tony Room, and Tyler Pager in The Washington Post, March 12, 2023

“Silicon Valley Bank Chief Should Return Stock-Sale Gains, Lawmaker Says,” by Pranshu Verma and Tony Room, The Washington Post, March 13, 2023

“Collapse of Silicon Valley Bank Reflects a Larger Anxiety, “ by Adam Sashiasky, The Washington Post, March 13, 2023

“Collapse of Silicon Valley Bank, Signature Bank Calls Fed Interest Rate Path Into Question,” by Nick Timiraos, The Wall Street Journal, March 13, 2003

“The Wall Street Journal Goes Full White Supremacist, Blames Silicon Valley Bank Collapse On ‘1 Black and 1 LGBTQ+,’ by Bess Levin, Vanity Fair, March 13, 2023

“Why is Credit Suisse in Trouble? The Banking Turmoil Explained,” by Caitlin McCabe and Josh Mitchell, The Wall Street Journal, March 16, 2023

“First Republic Bank in Rescue Talks With Biggest U.S. Lenders,” by David Benoit, Dana Cimilluca, Ben Eisen, Rachel Louise Ensign, and AnnaMaria Andriotis, The Wall Street Journal, March 16, 2023