Silicon Valley Bank and Signature Collapses: What We Know

On Friday, Silicon Valley Bank, a lender to some of the biggest names in the technology world, became the largest bank to fail since the 2008 financial crisis. By Sunday night, regulators had abruptly shut down Signature Bank to prevent a crisis in the broader banking system. The banks’ swift closures have sent shock waves through the tech industry, Wall Street and Washington.

Here’s what we know so far about this developing story.

Why did Silicon Valley Bank fail?

Silicon Valley Bank provided banking services to nearly half of the country’s venture capital-backed technology and life-science companies, according to its website, and to more than 2,500 venture capital firms.

For decades, Silicon Valley Bank, flush with cash from high-flying start-ups, did what most of its rivals do: It kept a small chunk of its deposits in cash, and it used the rest to buy long-term debt like Treasury bonds. Those investments promised steady, modest returns when interest rates remained low. But they were, it turned out, shortsighted. The bank hadn’t considered what was happening in the broader economy, which was overheated after more than a year of pandemic stimulus.

This meant that Silicon Valley Bank was caught in the lurch when the Federal Reserve, looking to combat rapid inflation, started raising interest rates. Those once-safe investments looked a lot less attractive as newer government bonds kicked off more interest.

But not all of Silicon Valley Bank’s problems are linked to rising interest rates. The bank was unique in ways that contributed to its rapid demise. Because the bank’s business was concentrated in the tech industry, Silicon Valley Bank started to see trouble when start-up funding began to dwindle, leading its clients — a mixture of technology start-ups and their executives — to tap their accounts more. The bank also had a significant number of big, uninsured depositors — the kind of investors who tend to withdraw their money during signs of turbulence. To fulfill its customers’ requests, the bank had to sell some of its investments at a steep discount.

Once Silicon Valley revealed its huge loss on Wednesday, the tech industry panicked, and start-ups rushed to pull out their money, resulting in a bank run.

By late last week, Silicon Valley Bank was in free fall. The Federal Deposit Insurance Corporation announced on Friday that it would take over the 40-year-old institution, after the bank and its financial advisers had tried — and failed — to find a buyer to step in. The takeover put about $175 billion in customer deposits under the control of the federal regulator.

The failure of Silicon Valley Bank, based in Santa Clara, Calif., is the largest since the 2008 financial crisis. In the aftermath of that crisis, Congress passed the Dodd-Frank financial-regulatory package, intended to prevent such collapses.

In 2018, President Donald J. Trump signed a bill that reduced how often regional banks had to submit to stress tests by the Federal Reserve. Last week, as news of Silicon Valley Bank’s failure spread, some banking experts said the Dodd-Frank package might have forced the bank to better handle its interest rate risks had it not been rolled back.

Why did Signature Bank fail?

Two days after the F.D.I.C. took control of Silicon Valley Bank, New York regulators abruptly closed Signature Bank on Sunday to stymie risk in the broader financial system.

Signature Bank, which provided lending services for law firms and real estate companies, had assets of less than $100 billion across 40 branches in the country. The bank’s clients had included some people associated with the Trump Organization, Mr. Trump’s company. In 2018, the 24-year-old bank began taking deposits of crypto assets — a fateful decision after the industry’s bottom fell out after the collapse of FTX.

Like Silicon Valley Bank’s clients, most of Signature bank’s customers had more than $250,000 in their accounts. The Federal Deposit Insurance Corporation only insures deposits up to $250,000, so anything more than that would not have the same government protection. Close to nine-tenths of Signature Bank’s roughly $88 billion in deposits were uninsured at the end of last year, according to regulatory filings. As Silicon Valley Bank’s troubles began to spread last week, many of Signature’s customers panicked and began calling the bank, worried that their own deposits could be at risk.

Signature saw a torrent of deposits leaving its coffers on Friday, according to a person with knowledge of the matter, and the bank’s stock, along with the stocks of some of its peers, also continued to tank.

What have regulators done so far?

Regulators have been rushing to contain the fallout, and the collapse of two banks in three days is prompting a swift re-evaluation of the Fed’s interest rate increases. Before the fallout from the banks’ collapse this weekend, the Fed had been expected to make a half-point increase at its next meeting, March 21-22.

In announcing the closing of Signature, regulators said on Sunday that depositors of the bank and Silicon Valley Bank would be made whole regardless of how much they held in their accounts and would have full access to their money by Monday.

On Monday morning, President Biden reassured Americans that the financial system was stable and that customers’ deposits would “be there when you need them.”

Treasury Secretary Janet L. Yellen on Sunday said regulators had been working over the weekend to stabilize the bank — and she tried to assure the public that the broader American banking system was “safe and well capitalized.”

At the same time, she acknowledged that many small businesses were counting on funds tied up at the bank.

Ms. Yellen suggested that a possible solution could be an acquisition of Silicon Valley Bank, emphasizing that regulators were trying to address the situation “in a timely way.” According to a person familiar with the matter, the F.D.I.C. on Saturday started an auction for Silicon Valley Bank that was set to wrap up Sunday afternoon.

If that push to find a buyer were to fail, the government would consider safeguarding uninsured deposits at the bank, another person said. But no decision had been made.

On Sunday, the F.D.I.C. invoked a “systemic risk exception,” which allows the government to pay back uninsured depositors to prevent dire consequences for the economy or financial instability.

On Sunday, the Fed also announced that it would set up an emergency lending program, with approval from the Treasury, to provide additional funding to eligible banks and help ensure that they are able to “meet the needs of all their depositors.”

Are other banks at risk?

The demise of both Silicon Valley Bank and Signature Bank put a spotlight on the challenges surrounding small and midsize banks, which tend to focus on niche businesses and can be more vulnerable to bank runs compared with its larger peers. The most immediate concern is that the failure of one would scare off customers of other banks. Both Silicon Valley Bank and Signature are small compared with the nation’s largest banks — Silicon Valley Bank’s $209 billion and Signature’s $110 billion in assets pales next to the more than $3 trillion at JPMorgan Chase. But bank runs can happen when customers or investors panic and start pulling their deposits.

On Monday, smaller banks rushed to reassure customers that they were on firmer financial footing.

Shares of U.S. regional banks plummeted on Monday, as investors tried to get a handle on the sudden collapse of Signature Bank and Silicon Valley Bank. First Republic Bank took the worst beating on the day, down 60 percent. Western Alliance in Arizona tumbled 45 percent, KeyCorp and Comerica both tumbled nearly 30 percent, and Zions Bancorp in Utah fell about 25 percent.

Shares of bigger banks were not affected as much: Citigroup and Wells Fargo each fell more than 7 percent, Bank of America fell more than 3 percent, and JPMorgan Chase dipped around 1 percent. The KBW bank index, which tracks the performance of 24 major banks, fell 10 percent, adding to sharp losses last week that erased nearly $200 billion from the aggregate value of the banks in the index.

Jessica Silver-Greenberg contributed reporting.