Silicon Valley Bank, Signature Bank Failures Send Bank Stocks Reeling

The banking sector remained in focus Monday after regulators swooped in over the weekend to avert a contagion crisis following Friday's news that Silicon Valley Bank, which services many large technology companies, start-ups and venture capitalists, collapsed. The regional bank owned by SVB Financial Group (SIVB) was closed last week by the California Department of Financial Protection and Innovation.  

Adding to the banking bedlam, Signature Bank (SBNY), a New York-based regional lender focused on the cryptocurrency market, was also shuttered by regulators over the weekend. This came after customers rushed to withdraw deposits from the bank, and officials deemed it a systemic risk to the financial system.

U.S. banking regulators from the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve and the Treasury Department quickly came together over the weekend to develop a plan to limit risk to the banking sector. The efforts included covering all deposits for customers of the failed banks. The Federal Reserve also created the Bank Term Funding Program, a new emergency initiative that will offer short-term loans to banks, credit unions and other depository institutions in order to "provide an additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress." 

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Because stock and bondholders in Silicon Valley Bank and Signature Bank will not be protected – and there are no taxpayer costs associated with the plan – it is not considered to be a "bailout."

What happened at Silicon Valley Bank?

The failure of Silicon Valley Bank – which marks the biggest bank to fail since the 2008 financial crisis – came just days after parent company SVB Financial Group sparked debt concerns when it sold Treasuries and other assets for a nearly $2 billion loss and announced a massive stock offering in order to raise capital. 

The bank had bought long-term Treasuries as deposit growth from start-ups soared in 2020 and 2021, but the value of these assets declined as interest rates rose. SIVB failed to find buyers for its Treasuries, which sparked a "bank run," with customers of Silicon Valley Bank simultaneously rushing to withdraw deposits – and creating worries over liquidity.

"The story began when insiders were advising clients to pull their money out, and as is often the case when financial institutions start to falter, people shot first and asked questions later," says Louis Navellier, chairman and founder of Navellier & Associates. "Why should this matter? Because fears are high that problems there may spread to other regional banks."

Will SVB and Signature's Failures Spread?

As for the impact of Silicon Valley Bank's failure on large banks, CFRA Research analyst Kenneth Leon does not see this as a fundamental or liquidity risk. "Large bank deposits have a diversified customer base (especially low-cost consumer deposits) that is sticky and not likely to exit these banks. SIVB had concentration risk to deposits in the technology and venture capital industry," Leon says.

President Joe Biden sought to reassure folks in Monday's early morning speech at the White House. "Look, the bottom line is this: Americans can rest assured that our banking system is safe. Your deposits are safe," Biden said. "Let me also assure you we will not stop at this. We’ll do whatever is needed." 

Although the financial system appears to have averted a crisis, bank stocks are still reeling. First Republic Bank (FRC) was among the day's biggest decliners, losing more than three-quarters of its value at one point in early Monday trading, while regional banks Western Alliance (WAL) and PacWest Bancorp (PACB) also racked up sizable losses.

Note: The FDIC protects depositors' bank accounts by insuring them for a maximum of $250,000. If you have any questions or concerns about your bank's FDIC insurance coverage, just check with the FDIC. And if you want to find a new home for your savings, that is federally insured, our tool — in partnership with Bankrate — will help you find an account that's right for you.