The federal government responded to the failures of SVB and Signature Bank by wiping out their shareholders and replacing their management. Those moves punish the appropriate parties without creating the moral hazard of incentivizing risky behavior in the future.
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10) The causes of SVB’s failure: Silicon Valley Bank’s failure was caused by poor risk-management policies and inability to adjust to a rising interest rate environment. Many of the bank’s customers are small technology companies with high growth and low (or no) earnings. The bank’s customers became less valuable as rising interest rates caused the present value of their future cash flows to decline. SVB’s investors, in turn, became more reluctant to provide further funding to SVB. Investor caution caused the bank’s customers in need of liquidity to accelerate withdrawals from their accounts at SVB. To meet those withdrawals, SVB was forced to sell long-term bond holdings (which decline in value as interest rates rise) at a loss.
9) The treatment of customer deposits: Under present law, the Federal Deposit Insurance Corp. (FDIC) insures customer deposits up to $250,000. On March 13, the FDIC, in an effort to diffuse a broader crisis, announced it would protect not only insured deposits but uninsured deposits in excess of $250,000 for customers of SVB and Signature Bank in New York.
8) Transfer of assets to bridge banks: The FDIC, with chartering help from the Office of the Comptroller of the Currency, has now created bridge banks and caused the deposits, qualified financial contracts and substantially all other assets of SVB and Signature Bank to be transferred to their respective bridge banks.
7) The ability to withdraw funds: In light of the FDIC’s actions, individuals with personal accounts at SVB can now withdraw all of their funds. Business customers with existing lending relationships with SVB may be required to continue to maintain their bank accounts at SVB under their loan documents. Customers should continue to make any loan payments in the ordinary course. Business customers with lines of credit should contact SVB’s bridge bank for further information on accessing their lines of credit.
6) Review insurance policies: If you are a business that was unable to access funds for the days immediately following SVB’s failure and thereby incurred any losses, review your insurance policies to see if coverage might be available, e.g. business interruption insurance.
5) Will similar protections be extended if there are more bank failures? It is not clear at this time if the FDIC will protect uninsured deposits at other institutions in the event of additional bank failures, but the better guess is it would do so.
4) The failure of SVB will likely be contained: SVB’s risk management policies were substandard compared to its peer group by a wide margin. This suggests that its failure was isolated and its impact will be contained.
3) There is some chance that SVB’s failure will not be contained: The behavior of market participants are influenced by emotion as well as reason. Fear and panic can lead to a lack of confidence in the banking system. The government’s actions to date appear to have successfully diffused the situation, but that has yet to fully play out.
2) Future regulation: The sudden collapse of SVB and Signature Bank will undoubtedly cause Congress to revisit the existing regulatory landscape to reduce the possibility of future bank failures.
1) The moral hazard question: Government intervention invariably raises the moral hazard of whether government’s good intentions in diffusing a current crisis (by protecting customers’ uninsured deposits) serve to encourage more risky behavior in the future. In this case, the federal government responded to the failures of SVB and Signature Bank by wiping out their shareholders and replacing their management. Those moves punish the appropriate parties without creating the moral hazard of incentivizing risky behavior in the future.
Mark Powers, a partner in Bowditch’s business and finance practice, specializes in bankruptcy, restructuring and workout. This feature is current as of March 20, 2023.
