Friday’s implosion of Silicon Valley Bank could blow a hole in the most innovative corner of the U.S. economy, interrupt tech workers’ paychecks and push other regional banks into similar distress. But one thing it doesn’t seem likely to do — at least for now — is trigger a wider financial meltdown, banking experts said.
Unlike the giant banks that ignited a global crisis in 2008, SVB was heavily dependent upon a single risky sector of the economy for both its depositors and its customers. That concentrated bet proved to be very bad news for the ambitious start-ups that dominate the high-technology world. But it means that the tech-friendly bank lacked the sophisticated financial entanglements with other institutions that can turn one bank’s losses into a threat to the entire industry.
In the wake of SVB’s stunning collapse, the first bank failure since 2020, customers, investors and financial analysts were tallying the episode’s toll.
Start-ups that had funds frozen in the doomed bank worried about coming up with enough cash to make payroll next week. Regulators scrambled to figure out what they had missed. Businesses such as Roku, California vineyards and philanthropic efforts backed by venture capitalists — including clinical trials for promising medical treatments — all faced a sudden loss of funding.
“It’s extremely painful. It could have very adverse consequences: microeconomic harm, social welfare harm. People all of sudden could be up the creek. But that’s not systemic,” said Karen Petrou, managing partner of Federal Financial Analytics, a Washington consultancy. “I don’t think we’re at risk of a crisis.”
For the Federal Reserve, the bank’s death marks both a sobering and salutary moment. The central bank has sharply increased interest rates over the past year, hoping that higher borrowing costs would slow the economy and take the steam out of high inflation. Higher credit costs inevitably would hurt the most speculative parts of the economy hardest. So it’s no surprise that a bank catering to risky tech companies might be among the first casualties of higher rates.
“This is what the Fed wants to see,” said Steven Kelly, a senior researcher at the Yale Program on Financial Stability. “They want to see tightening financial conditions, though this probably makes them more nervous about where they are in the tightening cycle.”
With $209 billion in assets, the bank was just one-eighteenth the size of JPMorgan Chase, the nation’s largest. Still, Wall Street was rattled by SVB’s abrupt end, the second-biggest bank failure in U.S. history, after Washington Mutual in 2008.
Share prices of the industry’s five largest players — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs — fell heavily in SVB’s final days. BofA was down nearly 12 percent in the past five trading sessions.
Despite the share price plummet, the large banks are likely to weather SVB’s demise. Wall Street titans can draw on more diversified funding sources than specialized regional institutions. Where SVB relied upon tech-focused venture capitalists for much of their funding, larger banks have millions of depositors, access to wholesale funding markets and interbank channels, Petrou said.
Regulations that were tightened in the wake of the 2008 financial crisis also have left the banks better armored against potential dangers. The Dodd-Frank Act required banks to hold more capital in reserve, as a buffer against unanticipated losses. At the end of September, JPMorgan Chase reported holding $236 billion in Tier 1 capital reserves.
“A run on JPMorgan of this scale, in my opinion, is unimaginable,” she said.
The banks that served the riskiest parts of the economy — like SVB or Silvergate Capital, a San Diego-based bank that catered to cryptocurrency users — are the ones getting into trouble. Silvergate announced on Wednesday that it would voluntarily wind down its operations, after crypto market plunge sparked a depositor exodus.
“It’s a run on the business model of this bank. Not a run on the business model of banking in general,” Kelly said, referring to SVB.
Investors are starting to shy away from some similar institutions. Signature Bank, a New York-based commercial bank with heavy exposure to the crypto industry, saw its shares lose 23 percent of their value after trading was halted earlier in the day.
SVB’s plight represents one of the early signs of financial stress caused by the Federal Reserve’s year-long campaign to raise interest rates.
The higher-rate era is reshaping financial calculations throughout the economy. Home buyers have seen the average 30-year mortgage rate more than double since the end of 2021 to 6.7 percent. The federal government’s interest payments on the national debt in 2025 are expected to be almost $300 billion higher than they were in 2022. And banks like SVB that boomed along with their risk-taking customers when rates were near zero found themselves on unfamiliar terrain.
After more than a decade of free or near-free credit, the abrupt change has been akin to moving from summer to winter in the blink of an eye. Investments that looked like sure winners when rates were low have turned into big losers in this new environment.
As depositors’ money flowed into SVB in 2021, the bank invested much of it in long-term government bonds. Rising rates starting in March made those government securities worth less than newly issued bonds, leaving banks like SVB with billions of dollars in unrealized losses on their books.
The higher rates also hurt the tech companies that were SVB’s biggest customers. To cover their withdrawals, the bank began selling its battered government bonds at a loss.
Daniel Beck, the bank’s chief financial officer, told investors last month that SVB would benefit from an end to the Fed’s rate-hike campaign. “To the extent that the Fed starts to move, and you start to see a reduction in rates, I think that is going to be helpful for us,” he said.
But the bank could not outlast the Fed. Little more than three weeks later, it failed.
On Wednesday, SVB reported a $1.8 billion loss from the sale of U.S. treasuries and mortgage-backed securities. Even as executives announced plans to raise additional capital, depositors pulled $42 billion in deposits on Thursday “causing a run on the bank,” according to California state regulators.
That left the once highflying SVB with a negative cash balance of $958 million at the close of business on Thursday. “The precipitous deposit withdrawal has caused the bank to be incapable of paying its obligations as they come due, and the bank is now insolvent,” Clothilde Hewlett, California’s commissioner of financial protection and innovation, wrote in an order on Friday.
The state took possession of the bank and appointed the Federal Deposit Insurance Corp. as receiver to wind it down. On Friday, federal officials said that amid the ruins of SVB, they had established a new bank — the Deposit Insurance National Bank of Santa Clara. All insured deposits from the old bank would be transferred to the new institution and would be available to depositors on Monday morning, the FDIC said.
The majority of the bank’s deposits, however, appear to be uninsured, which means those funds could be lost. Some tech voices already are calling for a federal bailout.
“Stop this crisis NOW. Announce that all depositors will be safe. Place SVB with a Top 4 bank. Do this before Monday open or there will be contagion and the crisis will spread,” David Sacks, a prominent venture capitalist, wrote on Twitter.
“The circumstances of the Silicon Valley Bank (SVB) collapse are unique enough that it probably won’t trigger a widespread financial contagion. Nevertheless, it is a timely reminder that when the Fed is singularly focused on squeezing inflation by jacking up interest rates — it often ends up breaking things,” economists at Capital Economics wrote in a client note Friday.
More things may be about to break. With inflation still uncomfortably high, the Fed is expected to continue raising rates. Investors now anticipate the central bank’s benchmark rate may rise to near 6 percent from a current target range of 4.5 percent to 4.75 percent.
Federal Reserve Chairman Jerome H. Powell says higher rates are needed to cool off an overheated economy and ease price pressures. But as rates go higher, additional financial losses are likely to emerge at other institutions.
“If the Fed keeps jacking up rates, it’s going to exacerbate the situation,” said Bert Ely, a veteran banking industry consultant. “I have a feeling [SVB] is not the only one out there.”
The Fed also plays a major role in monitoring banks. As a state-chartered institution, SVB also would have been subject to examinations by California regulators. A spokesman for the Fed declined to comment.
But some are already asking how obvious risks were allowed to reach this point.
“The common theme here is regulators are not paying attention to banks related to crypto and private equity,” said Jerry Comizio, a professor at American University’s Washington College of Law. “The question is: Why didn’t the regulators step in?”