On March 10, 2023, the banking industry was rocked by the collapse of two major institutions: Silicon Valley Bank (SVB) and Signature Bank. SVB, once ranked as the 16th largest bank in the United States, made history as the second-largest bank to fail in the country.
Its investments in long-term bonds at the wrong time led to a loss of over $160 billion in value in just one day. Panicked depositors attempted to withdraw their money, but SVB couldn’t provide the cash as it was all tied up in risky investments.
The result was a bank run that triggered the Federal Deposit Insurance Corporation (FDIC) to intervene, taking over the bank to protect the financial system and provide depositors with access to their funds.
This post will explore the collapse of Silicon Valley Bank and Signature Bank, their impact on the industry, and the lessons we can learn from them.
The Collapse of Silicon Valley Bank
SVB’s collapse can be traced to a risky investment strategy that relied heavily on long-term bonds, leaving the bank unable to provide depositors with their money when they needed it.
The panic exacerbated the bank’s troubles among depositors, which led to a bank run and further depletion of cash reserves. The bank’s CEO, Greg Becker, sold $3.6 million of company stock less than two weeks before the firm disclosed the extensive losses that led to its demise. This move raised questions about insider trading and contributed to the loss of investor confidence in the bank.
SVB had about $209 billion in assets and $175.4 billion in deposits at the time of its failure, and many of its depositors were technology workers and venture-capital-backed companies. The FDIC stepped in to guarantee the deposits and stabilize the financial system.
The Collapse of Signature Bank
Signature Bank’s collapse was also a cause for concern among regulators and investors. The bank’s troubles began when its customers started withdrawing cash too quickly, leading to a drain on its cash reserves.
This was partly due to concerns about the bank’s exposure to the real estate market, which had experienced a downturn. Signature Bank had significant holdings of commercial real estate loans, and the value of these loans had fallen sharply.
As a result, depositors began to lose confidence in the bank and started withdrawing their funds. State regulators stepped in to take over the bank to stabilize the financial system and protect depositors’ funds. The FDIC also guaranteed depositors’ funds, ensuring they would receive their money.
Both the collapses of Silicon Valley Bank and Signature Bank highlighted the importance of maintaining strong financial practices, effective regulation, and risk management in the banking industry. The FDIC’s intervention in both cases prevented a complete collapse of the banking system and protected the interests of depositors.
But the fallout from these failures raised questions about the stability of the banking industry and the need for stronger safeguards to protect against future collapses.
Lessons Learned from the Recent Bank Collapses
The collapse of Silicon Valley Bank and Signature Bank provides several lessons that can help us navigate the uncertain waters of the financial industry.
The first lesson is the importance of diversification. Putting all our eggs in one basket can be tempting, but when that basket collapses, we risk losing everything. Diversification is key to avoiding overexposure to any single institution and spreading out our investments to minimize risk.
Another is the importance of effective regulation. The FDIC’s intervention prevented a complete collapse of the banking system and ensured that depositors received their funds.
The collapse of Silicon Valley Bank and Signature Bank also underscores the importance of working with a trusted and experienced accounting firm. At Ellrich, Neal, Smith & Stohlman, P.A., we pride ourselves on providing a wide range of support to help you navigate the complexities of the financial world.
Weathering the Banking Storm
The failures of Silicon Valley Bank and Signature Bank were not merely isolated incidents but rather a warning of the inherent fragility of the banking system. Additionally, it serves as a reminder to do your due diligence with your finances.
At Ellrich, Neal, Smith & Stohlman, P.A., we offer a wide range of services to help you protect and grow your assets. With departments in Valuation and Transaction Advisory Services, Tax and Accounting, and Wealth Management Services, we can provide expert guidance and support for all your financial needs. Contact us to speak with one of our certified public accountants and learn more about how we can help you navigate the financial industry and protect your assets.