One of the absolute biggest news story to hit the tech, real estate and U.S. markets as a whole this week is the complete collapse of Silicon Valley Bank, a lender to some of the biggest names in technology, was the biggest bank to go under since the 2008 financial crisis.

Too Big To Fail? Not This Time.

A significant percentage of Silicon Valley technology startups and the venture capitalist that fund their bank with Silicon Valley Bank (SVB). In fact their website states that they provide banking services for nearly half of America’s venture capital-backed life-science and technology companies. Silicon Valley bank is the 16th largest bank in the nation. The accounts in SVB bank fund the payroll of those companies and that money needs to be available for the businesses that use the bank to pay their bills. In addition, many of the founders of those tech companies store a portion of their wealth in SVB Bank.

This looks a lot like 2008 and the banking collapse that happened that triggered TARP (the Troubled Assets Relief Program) and the subsequent Dodd/Frank Bill. Periods of growth and recession in the US economy are cyclical. To recover from recessions, in this scenario one caused by COVID-19, the fed lowers interest rates to stimulate growth, but those interest rates are left too low for too long and money is injected into the economy in a process called quantitative easing. When the Fed sees inflation shooting up, usually in the form of real estate price increases that go beyond affordability, the FED starts to raise those rates, and they raise them high and fast. During COVID, the FED’s lowered the yields of the 10 year treasury bond, lowering the rate to borrow money for large lenders and lowering mortgage rates to an all time low for the general consumer as well .

Here is what we know about Silicon Valley Bank and how they got here:

• The bank took in too many large deposits that were subject to higher interest rates.
• Silicon Valley Bank was inundated with cash from start-ups and did what many of its competitors do: It invested some of that cash in long-term debt such as Treasury bonds. These investments promised steady, moderate returns at low-interest rates. Unfortunately, the bank failed to consider what was happening in the broader economy, which had become overheated after more than a year of stimulus for pandemics.
• Silicon Valley Bank was left behind when the Federal Reserve raised interest rates to combat inflation. As newer government bonds offered higher returns, once-safe investments became less appealing.
• Silicon Valley Bank found itself in a precarious predicament when start-up funding began to dry up. Customers, both executives and start-ups alike, were forced to withdraw their money, prompting the bank to sell some of its investments to meet customer demands.
• However, not all problems with Silicon Valley Bank were due to rising interest rates. Its unusual circumstances also contributed to its swift demise. The Federal Deposit Insurance Corporation only insures accounts up to $250,000. Anything beyond this would fall under government protection and thus leave Silicon Valley Bank vulnerable. Furthermore, there were many uninsured and big depositors – these are investors who often cash out during economic turmoil.
• On Wednesday, Silicon Valley suffered an enormous setback that sent shockwaves through the tech sector as entrepreneurs scrambled to recover their investments.
• Last week, the Federal Deposit Insurance Corporation (F.D.I.C.) took control of the bank after it ran into financial difficulty.

Last Wednesday, Silicon Valley Bank was finally let go last Wednesday after failing to find a buyer. As such, the Federal Deposit Insurance Corporation announced its intentions to take over the 40-year-old institution and acquire $175 billion of customer deposits. With this takeover underway, federal regulators now possess control of more than $175 billion of customer funds.

Silicon Valley Bank’s collapse in Santa Clara (Calif.) is the biggest since 2008’s financial crisis. Congress passed the Dodd-Frank economic regulatory program as a response to that crisis to prevent similar failures from occurring again.

In 2018, President Trump signed a bill that reduced the frequency of stress testing regional banks were required to submit to the Federal Reserve. As news spread about Silicon Valley Bank’s collapse, experts in banking suggested that it had not been repealed, and it may have made managing interest rate risk more challenging for the bank.

Concerns have been expressed over the bank’s insolvency and other institutions.

Silicon Valley Bank is a mere shadow of America’s biggest banks, boasting only $209 billion in assets compared to JPMorgan Chase’s $3 trillion. Bank runs can occur when investors or customers become panicky and withdraw their funds; this week, there was concern that Silicon Valley Bank’s failure could spread panic among customers.

On Friday, shares of Signature Bank in New York and First Republic Bank, located in San Francisco, were down over 20%. On the other hand, shares of JPMorgan, Wells Fargo, Citigroup, and Citigroup – some of America’s biggest banks – did not suffer the same fate and ended the day even higher than they had started on Friday morning.

The federal government is scrambling to decide on its next move.

Regulators work quickly to contain the chaos, especially before markets reopen Monday and the business week begins. Janet L. Yellen, the Treasury Secretary, reported that regulators were working hard to stabilize the bank over the weekend. She also sought to reassure Americans of the safety and financial strength of American banking systems. She acknowledged that many small businesses relied on banks for funds.

Ms. Yellen suggested acquiring Silicon Valley Bank as a potential solution, noting that regulators were working hard to resolve the issue “within a timely manner.” According to someone familiar with the situation, an F.D.I.C. official confirmed on Saturday morning that an auction for Silicon Valley Bank had started and would conclude Sunday afternoon.

Several others suggested that if efforts to find a buyer fail, the government might consider protecting uninsured bank deposits. However, no decision had been made at this time.

F.D.I.C. Insurance Covers Deposits Up To $250K Customers will Be Reimbursed, but It Is Not Guaranteed that those with more significant deposits will get all their money back.

The Federal Deposit Insurance Corporation (F.D.I.C.) is another viable solution for repaying all depositors; they usually handle this task efficiently while leaving the private sector to absorb losses from uninsured depositors. If necessary, however, F.D.I.C. could circumvent this requirement by invoking a “systemic risk exception,” enabling the government to pay out uninsured depositors – an approach with severe implications for economic activity and overall financial stability.

However, it can be challenging to invoke this exception. The Treasury secretary must consult with the president and Federal Deposit Insurance Corporation before making a final decision, which then needs the concurrence of both institutions.

So what does it mean when a bank fails?  

It means that the bank can’t pay out all of the money that is being requested to be withdrawn from its accounts.  This looks a lot like 2008 and the banking collapse that happened that triggered Tarp and the subsequent Dodd/Frank Bill.  Let’s look at how these patterns keep repeating themselves.

• The economy has low interest rates to stimulate growth, but those interest rates are left too low for too long, and money is injected into the economy.
• When the Fed sees inflation in the form of real estate price increases that go beyond affordability, the FED starts to raise those rates, and they raise them high and fast.
• The 10 year treasury bond yields were low during the low interest rate periods and this is what affects mortgage rates.
• Low mortgage rates typically mean higher real estate prices.  As the rates rise the bond yields rise, the mortgage rates rise as well.

Here’s the problem, when the rates were low many banks were encouraged by the FED to invest in those low yield bonds. Silicon Valley Bank invested billions of dollars in bonds that were only yielding 1.75%.  Now that the bond yields are higher, people only want to buy higher yield bonds, so it is harder for the people holding the lower yield bonds to sell them. Ultimately, invoking an exception may not be possible this time around regardless of want to do so. The U.S Treasury Department, the U.S. President and the F.D.I.C. will need to sign off on such a decision. We’ll need to continue to wait and see.