What does Silicon Valley Bank’s (SVB) collapse mean for the banking industry?
Silicon Valley Bank (SVB), a U.S. commercial bank, collapsed on March 10, 2023, in the second-largest bank failure in national history and the largest since the 2008 financial crisis. California banking regulators took control of the bank and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The FDIC quickly established the Deposit Insurance National Bank of Santa Clara (DINB) and transferred all insured SVB deposits to DINB.
As the banking community and its regulators evaluate the collapse of SVB and attempt to prevent any related financial contagion, it is critical that all parties prioritize effective risk management steps and determine how to manage ongoing interest rate risk amid a distressed financial and economic environment.
Background on Silicon Valley Bank (SVB)
Silicon Valley Bank (SVB) was a major U.S. commercial bank that focused on providing financing for technology and healthcare startups, holding $209 billion in assets by the end of 2022 and ranking among the top 20 U.S. commercial banks. The bank's financial troubles reportedly stemmed from several factors, including heavy investments in U.S. Treasury bonds and other debt-backed securities in 2021 that declined in value as the Federal Reserve raised interest rates in response to inflation, as well as startups withdrawing funds held by SVB due to a lack of venture capital funds. On March 8, 2023, SVB announced its effort to raise $2.25 billion in capital, but the next day, a massive run on the bank occurred when depositors attempted to withdraw around $42 billion in funds, eventually leading to its collapse.
Regulators’ Responses to Silicon Valley Bank (SVB) Collapse
In response to the collapse of Silicon Valley Bank (SVB), on March 12, 2023, federal regulators announced plans to backstop depositors and financial institutions associated with SVB, ensuring full access to all funds. This measure aims to prevent a systematic banking panic; but there will be no government bailout and taxpayers will not bear the losses. The U.S. Treasury Department has designated SVB as a systemic risk, granting it the authority to wind down the institution in a way that protects all depositors. Moreover, the Federal Reserve has created a new Bank Term Funding Program (BTFP) to help institutions affected by SVB's collapse by providing loans of up to one year.
What’s Next for the Banking Industry?
Many experts are predicting additional regional bank failures as customers have withdrawn deposits in favor of more stable financial institutions. In addition to SVB, another U.S. commercial bank, Signature Bank, was also closed on March 12 by New York state officials. Signature Bank’s closure came amid the failure of Silvergate Bank, which was a major bank for the cryptocurrency industry. Securities class action lawsuits and other corporate litigation have already been brought against these companies and their management teams, and we expect additional litigation activity to be prominent as shareholders experience significant losses across the banking industry.
What Should Clients Do?
Banking institutions and other financial services firms should be evaluating the strength of their balance sheets and risk management programs and determining whether they are sufficient given the current financial and economic environment. Firms should also be proactively reviewing the strength and composition of their insurance program structures, including the strength and effectiveness of the insurance policies that protect the firm and its directors and officers.
How Can Alliant Help?
Alliant Financial Institutions specializes in complex risk and has guided financial institutions through several cycles and financial crises. Our experienced team has meaningful experience with respected leaders who have been recognized by our clients for taking an analytical approach, creating customer-driven solutions and effectively responding to the ever-changing circumstances and regulations of the financial institutions industry.
Financial R&R hosts, Ron Borys, Ryan Farnsworth and Steve Shappell dive into the recent event with SVB and provide valuable insights into the immediate takeaways and next steps, as well as the coverage provided by D&O or E&O policies. LISTEN NOW
For more information, contact:
Managing Director, Financial Institutions
Senior Vice President, Financial Institutions
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Alliant note and disclaimer: This document is designed to provide general information and guidance. Please note that prior to implementation your legal counsel should review all details or policy information. Alliant Insurance Services does not provide legal advice or legal opinions. If a legal opinion is needed, please seek the services of your own legal advisor or ask Alliant Insurance Services for a referral. This document is provided on an “as is” basis without any warranty of any kind. Alliant Insurance Services disclaims any liability for any loss or damage from reliance on this document.
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