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The Silicon Valley Bank Collapse

An Inside Look at the Factors Behind the Collapse of a Once-Promising Financial Institution

By PinkeePublished 12 months ago 3 min read


'The collapse and seizure of Silicon Valley Bank (SIVBQ) by the FDIC on March 10, 2023, caused a loss of confidence in the banking system, not just in the United States but globally. The challenge of analyzing bank safety is that a severe loss of confidence can cause an otherwise functioning financial institution to come under duress. In response to this challenge, a systematic methodology was employed to monitor the strains on the banking system weekly via the U.S. Banking System Stress Monitor. The analysis is based on market pricing data, government money market mutual funds asset flows, and bank data from the Federal Reserve's H.4.1 and H.8 weekly reports.

Despite the loss of confidence caused by the collapse of Silicon Valley Bank, large banks have outperformed the S&P 500 for the first time since the crisis began. This was driven by better-than-expected earnings from four large banks and generally supportive forward guidance. However, the KBW Bank index is still down almost 18% year-to-date, and smaller bank stocks declined nearly 22% year-to-date, as measured by the KBW Regional Bank index.

Credit default swap (CDS) prices are an additional indicator of the probability of borrower default. CDS prices for four of the U.S.'s global systemically important banks (G-SIBs) fell due to better earnings data and are close to the lowest since this crisis began.

A straightforward way to measure the stress in the U.S. banking system is the magnitude of bank support provided by the Federal Reserve via various facilities. The most common is the discount window, which banks generally avoid, but the facility can provide emergency liquidity. In addition, following the collapse of Silicon Valley Bank, the Federal Reserve announced a new facility to help banks meet withdrawal requests from depositors and restore confidence. The Bank Term Funding Program (BTFP) allows banks to borrow up to the face value of any government bonds held in the bank's portfolio at a very reasonable rate. The Paycheck Protection Program (PPP) facility was created in 2020 to provide support during the pandemic. Other credit is the support of the bridge banks, operated by the Federal Deposit Insurance Corporation (FDIC) until they can be sold or liquidated.

After the seizure of Silicon Valley Bank and Signature Bank, discount window and bridge bank credit usage soared. However, there was a significant shift from discount window borrowing to using the bank term funding program (BTFP). This week, there was a reduction in the discount window and BTFP usage, and the credit used by the bridge banks fell as the FDIC made some headway in winding down the failed banks. Overall, the reduction in Fed bank lending across all four available facilities indicates that the impact of the banking crisis is receding.

Bank deposit outflows stopped, and deposits grew for the first time since the beginning of the crisis across large, small, and foreign-related banks. Notably, the 25 largest banks, which include many midsize regional banks, gained deposits since the failure of Silicon Valley Bank, while the smaller banks lost deposits.

Small banks saw another $28.2 deposit inflow this week, and there was no downward revision to small deposits for the previous week. However, cash has continued flowing into government money market funds, which confirms the pressure on deposits to leave the banking system. This movement, also known as “cash sorting,” reflects savers reaching for higher yields while avoiding the credit risk at banks.

Banks continued to make loans despite the crisis, but total bank lending was negative again this week, driven by smaller and foreign-related banks. If banks are forced to hoard extra liquidity to bolster their defenses against possible additional deposit flight and increased loan losses, loan growth should be expected to slow.


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