Federal Reserve Vice Chair for Supervision, Michael Barr, has characterized Silicon Valley Bank’s failure as a “textbook case of mismanagement”. In written testimony submitted to the Senate Banking Committee, Barr attributed the bank’s collapse to a “concentrated business model” focused on serving venture capital and high-tech firms in Silicon Valley.
Barr further cited the bank’s failure to manage the risks associated with its bond holdings as a contributing factor to its demise. The value of these holdings declined as the Federal Reserve raised interest rates, exacerbating the bank’s already precarious financial situation.
Earlier this month, the Federal Deposit Insurance Corp. (FDIC) took over Silicon Valley Bank, resulting in the second-largest bank failure in US history. The FDIC has now announced that First Citizens Bank, based in North Carolina, has agreed to purchase around one-third of Silicon Valley’s assets.
The deal will see First Citizens Bank acquire $72 billion worth of assets at a discount of $16.5 billion. However, the FDIC has also confirmed that its deposit insurance fund will take a $20 billion hit as a result of its rescue of Silicon Valley Bank. This figure represents a record amount for the agency, in part because it agreed to backstop all deposits at the bank, including those above the $250,000 cap.
Silicon Valley Bank’s business model was heavily reliant on the success of the companies it served, many of which were startups with uncertain futures. The bank’s focus on serving this niche market left it vulnerable to a downturn in the tech industry, which is exactly what happened when the Federal Reserve began to raise interest rates.
The decline in the value of Silicon Valley Bank’s bond holdings only compounded the problem, leaving the bank with insufficient capital to weather the storm. Despite attempts to shore up its finances, the bank ultimately proved unable to survive on its own.
The FDIC’s decision to sell Silicon Valley Bank’s assets to First Citizens Bank is seen as a way to mitigate the damage caused by the bank’s failure. By offloading a significant portion of the bank’s assets, the FDIC hopes to limit the losses incurred by its deposit insurance fund.
The fact that the FDIC was forced to intervene in the first place highlights the risks associated with concentrated business models and the dangers of failing to manage risk effectively. As Barr notes in his testimony, Silicon Valley Bank’s failure is a cautionary tale for other financial institutions, demonstrating the importance of diversification and risk management in the banking sector.