2023 Banking Crisis

By Ollie B. ’25

On March 10th, it was chaos. In Silicon Valley, people frantically worried, hoping to retain their assets before they were lost. What just happened? Silicon Valley Bank (SVB), one of the premier banks in the area, was experiencing a bank run. And what would happen afterward has become one of the most problematic financial issues in a long time. 

However, before understanding the banking crisis’s current effects on society, it is essential to understand the events leading up to this volatile and tense financial situation. Being located in Silicon Valley, there are numerous start-up companies, all of which require money. And with various ventral-capitalist firms in the area, many of these companies acquire the capital and put it into SVB. Yet, during the Covid-19 pandemic, the amount of new tech, life science, and other companies surged, which increased the deposits in SVB. SVB had so many deposits from venture-backed tech and life science firms that they banked almost half of them. 

As a consequence of these increasing deposits, SVB had to raise its capital using two main methods: they made loans and invested in bonds. Specifically, they invested in Treasury bonds and long-term debts. However, to combat rising inflation, the Federal Reserve increased interest rates, subsequently diminishing the value of bonds. Since more deposits were being made than anticipated, SVB had to gain capital by selling their bonds earlier than anticipated. With these actions, SVB sold its bonds at a loss of $1.8 billion. 

On March 8th, the public learned this vital information, and SVB informed everyone they needed to raise more capital. With their plan to sell common and preferred stock to raise $2.25 billion, SVB hoped to alleviate any concerns. However, on March 9th, SVB’s stock plummeted along with other prominent banks. Within one day, the market value of JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup declined by $52 billion. Due to widespread fear, many venture-capital firms and portfolio companies then withdrew their money from SVB. By the end of the day, people attempted to withdraw $42 billion from SVB, creating a bank run. Due to such tension within the bank, on March 10th, federal regulators took control of the bank, becoming the second-biggest bank failure in U.S. history. 

In addition to SVB’s downfall, on March 12th, Signature Bank was also seized by federal regulators. And due to its profound impact on all the customers, the federal regulators ensured money would be returned to all the customers. While this process would seem the fairest, in history, the Federal Deposit Insurance Corporation (FDIC) only insures bank deposits up to $250,000. Yet, since most customers had much more liquid in the bank, the federal regulators insured all their deposits in fear of widespread panic throughout the nation. 

Among the panic was First Republic Bank, whose stock continually plummeted after SVB’s downfall. With two U.S. banks having collapsed in a matter of days, federal regulators and other banks hoped to preserve First Republic Bank to decrease concerns. Therefore, on March 16th, eleven banks deposited $30 billion into First Republic to keep the bank afloat. Yet, despite numerous efforts, on March 17th, First Republic Bank’s stock continued to drop. On April 24th, First Republic announced about $100 billion in deposits were pulled out during March.

Due to such losses and concerns within the public, on April 28th, it was announced that big banks JPMorgan Chase & Co. and PNC Financial Services would follow a government seizure of the bank. Currently, this seizure can come as soon as the weekend. With their stock dropping from $115 per share to $3.51 per share since March 8th, the current plan seems to be the most viable option. After the government seizes First Republic Bank, one of the other larger banks would take over First Republic, allowing customers to have their money insured by a financially stable institution. 

Yet, while many issues seem to be resolved, there are still questions about how this financial meltdown occurred, and many of the answers return to a lack of supervision. According to the Federal Reserve’s banking supervisors, the bank failed to take forceful action and pay attention to vulnerabilities as SVB grew in size. Even when finding risks, they failed to fix problems quickly, leading to the bank’s eventual downfall. Regarding Signature Bank, the FDIC believed it didn’t act fast enough when finding complications with its management. They also thought Signature Bank grew too quickly and disregarded the FDIC’s concerns.

However, with so much reflection on the past, the government and Federal Reserve look towards the future. Michael Barr and Jerome Powell, the chairs of the Federal Reserve, both advocate for more through rules and oversight, hoping our nation does not have to go through such a dire banking crisis again.

Categories: News

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