California regulators seized Silicon Valley Bank — a storied cornerstone of the start-up economy, and, as of last year, the country's 16th largest bank — declaring it to be "conducting its business in an unsafe manner" and insolvent.
After panic swept across the Bay Area that businesses and nonprofits with millions of dollars in the failed bank's vaults might be unable to access their cash and be forced to shutter, bank regulators with the Federal Deposit Insurance Corporation (FDIC) announced late Sunday, March 12, that the agency planned to guarantee all deposits. The bank reopened Monday under the FDIC's stewardship.
Now, Silicon Valley investors, start-up employers, California budget analysts and lawmakers are watching closely to see whether this is the end of a minor crisis — or just the beginning of a major one precipitated by higher interest rates.
Gov. Gavin Newsom welcomed the Sunday afternoon federal intervention, saying in a statement that it will have "profoundly positive impacts on California ... ensuring our innovation economy can continue to grow and move forward."
Meanwhile, a spokesperson for the Newsom administration's Department of Finance said it was still far too early to say what the bank failure and its attendant economic impact might have on the state's already dragging budget picture.
Silicon Valley Bank's sudden demise will be studied and debated for weeks and months to come. But for all the bank's association with innovation and newfangled tech, the factors behind its collapse seemed to be, in the words of Bloomberg columnist Matt Levine, "sort of boring and normal" as far as bank failures go.
Long story short: Depositors began withdrawing money just as the bank's investments began to tank.
On the depositor side, much of the bank's money came from start-ups and other Silicon Valley savers. Driven by higher borrowing rates and the end of a pandemic surge in demand for remote everything, Silicon Valley has seen a parade of layoffs this year, and depositors with the bank have been drawing down their savings. Higher interest rates also led many of those savers to seek out higher returns for their cash elsewhere.
This drawdown required the bank to cash out some of its investments. Unfortunately for the bank, many of those were in long-term Treasuries and mortgage-backed securities. As the Federal Reserve has cranked up interest rates to quell inflation, the value of those assets plummeted. Thus, on Wednesday, March 8, the bank announced losses of $1.8 billion.
Spooked by that news, many depositors tried to take all their money out at once. The next day, $42 billion disappeared from the bank's digital vaults, according to California regulators, a mass withdrawal urged on by some tech sector giants, including the venture capital fund co-founded by conservative billionaire Peter Thiel.
The result: an old-fashioned bank run the likes of which even Jimmy Stewart would recognize. The withdrawals left the bank, which had $175 billion in deposits at the end of last year, with a negative cash balance of nearly $1 billion Thursday.
A casualty of anti-inflation policy
Some commentators have been less charitable to the erstwhile bank, arguing the bank's management did little to calm skittish investors leading to "an own goal" (in sports terms, a goal scored against one's own team) of epic proportions.
Because the bank's financial troubles can be traced back to higher interest rates, Silicon Valley Bank might be called the first major casualty of the Federal Reserve's anti-inflationary policy.
The big question is whether it will be the last. After the federal takeover, investors raced away from similarly positioned regional banks, worried that they too might be facing a borrowing rate squeeze.
Because the Federal Deposit Insurance Corporation typically backs deposits only up to $250,000, many of the bank's clientele, disproportionately made up of start-ups with millions socked away, last week faced the fearsome prospect of finding themselves cashless and unable to make payroll. That scenario ultimately led the federal government to intervene on Sunday.
One venture capitalist warned of a "mass shutdown of all American startups." Reporting over the weekend highlighted the potential collateral damage that could befall everything from affordable housing projects to the Napa wine industry to solar panel producers. Bay Area politicians called for urgent federal action.
"If theoretically the federal government did nothing, we would have risk of contagion and the spread of it would just be very bad," said state Sen. Scott Wiener, a San Francisco Democrat, prior to federal regulators' announcement.
That announcement came Sunday afternoon: "Depositors will have access to all of their money starting Monday, March 13," FDIC Chairman Martin J. Gruenberg said in a joint statement with Treasury Secretary Janet Yellen and Federal Reserve Board Chair Jerome H. Powell.
That's an unusual resolution for a bank failure, said Joao Granja, an accounting professor who specializes in banking regulation at the University of Chicago. Typically, federal regulators will try to find another private bank to take over the failed one, guaranteeing all of its deposits.
The fact that no buyer was immediately forthcoming reflects both "how suddenly and quickly the situation unfolded," said Granja, but also that Silicon Valley Bank is "large and specialized" in the tech sector.
What Silicon Valley means to California's budget
The state as a whole need not panic just yet, said Emily Mandel, an economist who monitors state finances for Moody's Analytics. The bank's failure is "more a symptom of ongoing weakness in the tech industry rather than a sea change," she said.
Still, California lawmakers are facing a $20 billion-plus deficit. Roughly half of the state's personal income tax revenue comes from the top 1% of earners, most of whom get paid in stocks and other financial instruments. That's why the possibility of additional tech sector hiccups and financial market gyrations aren't likely to be welcome news in the Capitol.
An analysis by the nonpartisan Legislative Analyst's Office last year noted that the total amount of income tax withheld from California paychecks was coming in far below expectations. The culprit, according to the report: A steep decline in salary bonuses and a dearth of new initial public offerings — stock exchange coming out parties that, just a few years ago, were regularly making fresh tech millionaires across the Bay Area.
But to the extent that the Silicon Valley Bank saga reflects underlying shakiness in tech, those concerns are likely already reflected in the state's dour fiscal projections, said Mandel.
"Yes, weakness in tech is going to result in some weakness in revenues but this doesn't change the contours of what we would expect," she said. "I don't expect this will be a repeat of '08, I expect this to be more of an isolated event."
The state's public sector pensioners also aren't likely to take a major hit in the short-term. Of the roughly $444 billion in investments currently managed by the California Public Employees' Retirement System, $67 million (roughly 2% of 1% of the total) were bonds to Silicon Valley Bank, according to a summary of the fund's investments through June of 2022. More recent figures are not yet available.
Broader rumblings in the tech world would reverberate through the pension fund's portfolio, but the exposure is still relatively limited. Taking Apple, Alphabet, Amazon, Meta and Microsoft together, CalPERS holds $1.7 billion in corporate bonds.
California Department of Finance spokesperson H.D. Palmer stressed that the failure of a single bank, though painful for those directly involved, won't on its own shake a state as large as California.
"Is this endemic? Is this a problem that 10 other banks are facing?" he said. "What we know so far comes nowhere near to bearing that type of projection out."
Others banks affected by the failure
Another Bay Area bank was affected Monday by uncertainty in the financial markets following Silicon Valley Bank's failure.
Stock in San Francisco-based First Republic Bank sank nearly 62% Monday and shares of other regional banks suffered losses, reportedly. First Republic has 86 locations across the country. Its Midpeninsula offices include two in Menlo Park and one each in Los Altos, Mountain View, Palo Alto and Redwood City.
Also, on Sunday, regulators seized New York-based Signature Bank after it failed.
But a San Jose State University professor of finance and accounting does not see the failure of Silicon Valley Bank and Signature Bank as signs of a coming crisis.
"I don't think it is a huge contagion issue," assistant professor Matthew Faulkner said. "It's more toward an isolated incident."
Over the weekend and Monday, top federal officials including President Joseph Biden appeared to be getting ahead of the issue.
Biden sought to ease Americans' fears by making all deposits held by Silicon Valley Bank customers available regardless of the amount of their deposits, federal officials said over the weekend.
"Americans can have confidence that the banking system is safe," Biden said Monday morning. "Your deposits will be there when you need them."
Investors will not be protected, Biden said. According to the president, they took a risk and "that's how capitalism works."
Taxpayers will not be on the hook for the losses. Money to cover the losses will come from fees that banks pay into the deposit insurance fund, Biden said.
In California, state Treasurer Fiona Ma said Monday that her office has no exposure to Silicon Valley Bank and state and local government funds are safe.
Additionally, companies that did business with Silicon Valley Bank won't have to pay any penalty if they must file their payroll taxes late, according to the California Employment Development Department, which collects payroll taxes.
Employers can request a waiver online at edd.ca.gov or in writing.
On Monday, First Republic Bank said it widened its financial position with liquidity from the U.S. Federal Reserve Bank and JP Morgan Chase and Co.
First Republic now has more than $70 billion to fund operations, the bank's officials said. Additional liquidity is available through the Bank Term Funding Program, which the Federal Reserve announced Monday and ensures banks can meet the needs of their depositors.
"First Republic's capital and liquidity positions are very strong, and its capital remains well above the regulatory threshold for well-capitalized banks," said Jim Herbert, founder and executive chairman, and Mike Roffler, president and CEO, of First Republic Bank. "First Republic continues to fund loans, process transactions and fully serve the needs of clients."
U.S. Senate hopeful Rep. Barbara Lee, D-Oakland, blamed the failure of Silicon Valley Bank on the rollback of federal financial regulations by former President Donald Trump.
"Federal oversight over large corporations and our economy is crucial and regulators must once again step in and ensure we do not repeat the mistakes made in 2008," Lee said in a statement.
Silicon Valley Bank was the 16th largest bank in the United States as of March 10, Faulkner said.
Faulkner suggests depositors open another account, if they have one with more than $250,000 in it, to protect themselves.
Silicon Valley Bank was focused on serving startups, Faulkner said, which was probably part of the reason it failed. But Faulkner said the public only knows part of the story.