In just one week, the U.S. banking sector has been shaken by two of the largest failures in its history. The collapse of Silicon Valley Bank (SVB) on March 10, followed closely by the closure of Signature Bank on March 12, has sent shockwaves through financial markets. These failures reveal systemic vulnerabilities among regional banks, raising concerns about their ability to navigate a landscape of rising interest rates, concentrated deposit bases, and increasing depositor anxiety.
The Federal Reserve, Treasury, and FDIC have responded swiftly and significantly, reflecting the seriousness of these failures. Their actions aim to stabilize the immediate situation, contain contagion, and restore confidence in the broader financial system. However, lingering questions remain about how such vulnerabilities went unaddressed and what risks still loom for other regional banks.
What We Know About the Failures
Both SVB and Signature Bank suffered from overexposure to niche markets. SVB’s client base was heavily concentrated in venture capital and technology startups, while Signature Bank had significant exposure to the cryptocurrency sector. This lack of diversification left both institutions vulnerable to sector-specific shocks.
Compounding this risk was the high proportion of uninsured deposits at both banks. A December regulatory filing revealed that over 90% of SVB’s deposits exceeded the $250,000 FDIC insurance limit, making it particularly susceptible to depositor runs. When concerns about SVB’s financial health arose, these uninsured depositors had no guarantee that their funds would be safe. This uncertainty likely fueled a rapid withdrawal of deposits, creating a liquidity crisis that the bank could not withstand.
The Federal Reserve’s rapid interest rate hikes to combat inflation exposed vulnerabilities in the balance sheets of both SVB and Signature Bank. Each institution held large portfolios of long-duration securities, including Treasury bonds and mortgage-backed securities. Although these assets are generally considered safe, they lost significant value as interest rates increased. When the banks were compelled to sell securities to meet deposit withdrawal demands, they incurred substantial losses, further undermining their financial positions.
Government Response
The collapse of Silicon Valley Bank on March 10 triggered an immediate response from regulators to avert a broader financial crisis. The FDIC quickly intervened, closing the bank and establishing a bridge bank to manage operations while looking for a potential buyer.
Recognizing the systemic risks posed by SVB’s failure, on March 12, the Treasury Department, FDIC, and Federal Reserve invoked a systemic risk exception, ensuring that all depositors—both insured and uninsured—would have full access to their funds. This exceptional measure was designed to prevent panic among depositors at other banks, particularly regional institutions with similarly concentrated deposit bases.
On March 12, the New York State Department of Financial Services closed Signature Bank after it experienced significant deposit withdrawals following SVB’s collapse. As with SVB, regulators acted quickly to protect depositors and a systemic risk exception was likewise applied to Signature Bank.
In addition to these immediate actions, the Federal Reserve introduced the Bank Term Funding Program (BTFP) on March 12. This facility is primarily designed to provide liquidity to banks facing deposit outflows, allowing them to borrow for up to one year using high-quality collateral. Importantly, the BTFP permits banks to borrow against these assets at par value, avoiding the need to sell securities at significant losses (the SVB problem).
Open Questions
The failure of two major banks in such quick succession raises critical questions about the role of bank supervisors. Although both institutions were subject to regulatory oversight, their vulnerabilities appear to have been underestimated or overlooked. Were supervisors caught off guard, or did they fail to act on warning signs? Why were measures not implemented earlier to address these risks, specifically the concentration of deposits and significant unrealized losses?
The role of the Fed’s Discount Window also comes into question. The Window is designed to provide emergency liquidity to banks in distress, yet its lack of use during the collapses raises important inquiries. Were the banks eligible to borrow? Did they have sufficient collateral at the Federal Reserve to access the facility? If not, why weren’t they better prepared to borrow, considering the increasing risks in their balance sheets and deposit bases?
Are Other Banks Vulnerable?
The failures of SVB and Signature Bank have spurred concerns about other regional banks with similar weaknesses. Institutions with high uninsured deposits and significant unrealized losses on long-duration securities should garner supervisory scrutiny. Ongoing vigilance and oversight will be essential to maintain confidence in the sector.
A Precarious Moment for Regional Banks
The failures of SVB and Signature Bank have revealed essential vulnerabilities in liquidity management, risk oversight, and depositor confidence. While the Federal Reserve, Treasury, and FDIC have acted decisively, the situation remains precarious. Regulators and policymakers must be ready to respond quickly and effectively should further instability emerge. Moreover, they must remain attentive to the risk of moral hazard.
Whether other regional banks can navigate these turbulent times without incident remains to be seen. Stay tuned.