On March 10th, the Silicon Valley Bank, a favorite of the tech industry, failed.
I’m having déjà vu…
Yes, we have been here before. The banking crisis of 2008 was triggered by the collapse of the housing market bubble and the subprime mortgage market. The crisis began when housing prices started to decline, and many borrowers started to default on their mortgages. A chain reaction ensued as the value of mortgage-backed securities and other financial assets plummeted, causing widespread panic in the financial markets. As a result, many large financial institutions (including Lehman Brothers, Bear Stearns, and AIG) became insolvent and were either bailed out by the government or went bankrupt.
The 2008 debacle had a severe impact on the US economy, causing widespread job losses, home foreclosures, and a sharp decline in consumer spending. The government responded with a series of measures, including:
- Troubled Asset Relief Program (TARP)
- Dodd-Frank Wall Street Reform and Consumer Protection Act
- Increased regulation of financial institutions
- Tighter lending standards
- Improved transparency
- Increased international cooperation
Overall, the 2008 banking crisis in the United States was a complex and multifaceted event that had far-reaching consequences for the US and the global economy. It highlighted the interconnectedness of the financial system and the need for better regulation and oversight to prevent similar crises from occurring in the future.
Sounds good… then what happened?
In 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act. This law rolled back some of the regulations that were put in place by the Dodd-Frank Wall Street Reform and Consumer Protection Act. For instance, it raised the threshold for enhanced regulatory scrutiny for banks from $50 billion to $250 billion in assets, meaning that smaller banks face less regulatory oversight.
Additionally, the Trump administration sought to ease some of the regulations on the financial industry through executive orders and rulemaking. For example, the Department of Labor proposed a rule that would make it easier for financial advisers to recommend investments that may not be in their clients’ best interests, and the Consumer Financial Protection Bureau underwent a significant restructuring, with some of its enforcement powers being curtailed.
However, many of the regulations put in place after the 2008 banking crisis remain in effect, and some of the changes made by the Trump administration were not as far-reaching as was previously expected.
“When Congress changed the law in 2018, it gave the Federal Reserve new leeway on how aggressively it regulates mid-sized banks. Trump appointees at the Federal Reserve took the opportunity to allow SVB and other banks in its asset size class to avoid regular stress testing and other safety checks.” Josh Kovensky, MSNBC
So we can blame it on Trump?
No, not necessarily. This was the work of an entire administration, a different fiscal approach, and it is not necessarily a partisan problem. The issue with SVP seems to be an oversight with their risk management team and regulatory requirements. And although banks are regulated and subject to stringent oversight, no bank is completely immune to financial shocks or other risks that can lead to insolvency. Having said that, Senator Elizabeth Warren had plenty to say to Treasury Secretary Janet Yellen on this topic.
Are we going to hear the “b” word again?
No – according to President Biden, SVB is not getting a bail out. The investors will have to take the hit and depositors are protected by FDIC (Federal Deposit Insurance Corporation) which provides deposit insurance up to $250,000 per depositor, per insured bank, which helps protect depositors and maintain public confidence in the banking system.
Glad this is over!
Not so fast. Credit Suisse is having some issues of its own and is relying on a loan from another major bank. (See: The End of Credit Suisse)
Here are several documents from Silicon Valley Bank currently available in the RealDealDocs database:
Silicon Valley Bank Loan And Security Agreement for FIVE9, CITY NATIONAL BANK
Silicon Valley Bank Loan And Security Agreement for Entrada Networks, Microtek Systems, Rixon Networks, Silicon Valley Bank, Sync Research, Torrey Pines Networks
Silicon Valley Bank Doubles Carecloud’s Credit Facility for CARECLOUD, CareCloud, Silicon Valley Bank
Yellen Open To Reexamining Bank Regs And Oversight After They Failed To Prevent SVB Collapse
Image courtesy of Tony Webster