They are perhaps the two most feared words for regulators of the financial industry: Bank run.

And that is what happened last week when depositors, during a single day, withdrew $42 billion from California-based Silicon Valley Bank (SVB), leaving it with a negative cash balance of a billion dollars.

“This was the first Twitter-fueled bank run,” is how Republican Representative Patrick McHenry, chair of the House Financial Services Committee, described the tsunami of withdrawals.

Depositors and others began speculating on social media about the bank’s health after CEO Greg Becker sent a letter to shareholders on March 8, revealing a loss of $1.8 billion on the sales of U.S. treasuries [debt obligations issued by the government to raise cash] and mortgage-backed securities. Becker outlined his quest to find more than $2 billion to stabilize the bank.

The letter was the catalyst for the second-largest failure of a financial institution in U.S. history and the first such collapse since an economic recession in the country 15 years ago.

As SVB was sinking, regulators in the state of New York suddenly shut down Signature Bank, known as friendly to the unstable cryptocurrency industry, after panic withdrawals there totaling $10 billion brought it to the brink of insolvency.

Some of Signature Bank’s biggest customers were the top crypto exchanges, which individually had hundreds of millions of dollars in deposits.

The bank runs threatened to expand, with individuals across the country whose deposits were more typically in the thousands of dollars and not millions of dollars wondering if their money was safe. Regional banks were especially vulnerable as their stock prices plummeted.

“If the damage had spread across our financial system, the deposits and savings of tens of millions of families and small businesses could have been at serious risk,” Majority Leader Chuck Schumer said on the Senate floor Tuesday.

The government corporation Federal Deposit Insurance Corporation (FDIC) stepped in with unprecedented action.

Most bank customers know the FDIC from its logo displayed at branches with the written assurance: “Each depositor insured to at least $250,000.” Such a limit is likely to cover the potential losses of most individual depositors in America, but Silicon Valley Bank’s well-heeled customers were high-tech startups and entrepreneurs with far larger deposits.

The FDIC decided that the customers of SVB and Signature would be made whole, no matter how much money they had in either of those banks. This restored consumer confidence, and there have been no additional runs on American banks. But the decision was perceived by some as a bailout for the wealthy.

“No losses will be borne by the taxpayers,” President Joe Biden said on Monday.

That is technically correct, as the FDIC is cashing out depositors from a pool of money that all insured banks are required to pay into. But “it is most definitely a bailout,” said Thomas Hoenig, distinguished senior fellow at George Mason University’s Mercatus Center and a former vice chairman of the FDIC.

“This is where the market discipline breaks down,” Hoenig said.

On its website, the FDIC touts its track record: “No depositor has ever lost a penny of insured deposits since the FDIC was created in 1933.”

The FDIC was formed as an independent agency during the Great Depression after a wave of bank runs led to the failure of thousands of financial institutions in the early 1930s, wiping out the savings of many Americans at a time of high unemployment.

“The FDIC was considered pretty radical at the time,” Hoenig told VOA. He noted that even President Franklin D. Roosevelt initially was uneasy about setting up a deposit insurance fund because of concern “about the moral hazard issue that people would not pay attention to what a bank was doing.”

A sister organization, the Federal Savings and Loan Insurance Corporation, was set up to protect depositors at non-commercial banks. The FSLIC and its parent agency, the Federal Home Loan Bank Board, eventually went bankrupt and were dissolved in 1989. The FDIC now is available to ensure those smaller thrift institutions, while the government-backed National Credit Union Administration, a successor to the Bureau of Federal Credit Unions, was established in 1970 to exclusively protect those depositors.

An FDIC bankruptcy “is always a possibility,” according to Hoenig. But the FDIC effectively has a line of credit from the U.S. Treasury it could access if there were to be massive bank failures and it ran out of money.

Right now, Hoenig noted, the FDIC has $100 billion in its fund. But that is against about $20 trillion in banking deposits. Hoenig cautions, “You really don’t want to be bailing out everyone every time, or you might as well just make these institutions public utilities.”
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Silicon Valley Bank’s collapse rattled the technology industry that had been the bank’s backbone, leaving shell-shocked entrepreneurs thankful for the government reprieve that saved their money while they mourned the loss of a place that served as a chummy club of innovation.

“They were the gold standard, it almost seemed weird if you were in tech and didn’t have a Silicon Valley Bank account,” Stefan Kalb, CEO of Seattle startup Shelf Engine, said during a Monday interview as he started the process of transferring millions of dollars to other banks.

The Biden administration’s move guaranteeing all Silicon Valley Bank’s deposits above the insured limit of $250,000 per account resulted in a “palpable sigh of relief” in Israel, where its booming tech sector is “connected with an umbilical cord to Silicon Valley,” said Jon Medved, founder of the Israeli venture capital crowdfunding platform OurCrowd.

But the gratitude for the deposit guarantees that will allow thousands of tech startups to continue to pay their workers and other bills was mixed with moments of reflection among entrepreneurs and venture capital partners rattled by Silicon Valley Bank’s downfall.

The crisis “has forced every company to reassess their banking arrangements and the companies that they work with,” said Rajeeb Dey, CEO of London-based startup Learnerbly, a platform for workplace learning.

Entrepreneurs who had deposited all their startups’ money in Silicon Valley Bank are now realizing it makes more sense to spread their funds across several institutions, with the biggest banks considered safer harbors.

Kalb started off Monday by opening an account at the largest in the U.S., JP Morgan Chase, which has about $2.4 trillion in deposits. That’s 13 times more than the deposits at Silicon Valley Bank, the 16th largest in the U.S.

Bank of America is getting some of the money that Electric Era had deposited at Silicon Valley Bank, and the Seattle startup’s CEO, Quincy Lee, expects having no difficulty finding other candidates to keep the rest of his company’s money as part of its diversification plan.

“Any bank is happy to take a startup’s money,” Lee said.

Even so, there are fears it will be more difficult to finance the inherently risky ideas underlying tech startups that became a specialty of Silicon Valley Bank since its founding over a poker game in 1983, just as the advent of the personal computer and faster microprocessors unleashed more innovation.

Silicon Valley quickly established itself as the “go-to” spot for venture capitalists looking for financial partners more open to unconventional business proposals than its bigger, more established peers who still didn’t have a good grasp of technology.

“They understood startups, they understood venture capital,” said Leah Ellis, CEO and co-founder of Sublime Systems, a company in Somerville, Massachusetts, commercializing a process to make low-carbon cement. “They were woven into the fabric of the startup community that I’m part of, so banking with SVB was a no brainer.”

Venture capitalists set up their accounts at Silicon Valley Bank just as the tech industry started its boom and then advised the entrepreneurs that they funded to do the same.

That cozy relationship came to an end when the bank disclosed a $1.8 billion loss on low-yielding bonds that were purchased before interest rates began to spike last year, raising alarms among its financially savvy customer base who used the fruits of technology to spread warnings that turned into a calamitous run on deposits.

Bob Ackerman, founder and managing director of venture funder AllegisCyber Capital, likened last week’s flood of withdrawal demands from Silicon Valley Bank to a self-inflicted wound by “a circular firing squad” intent on “shooting your best friend.”

Many of Silicon Valley Bank’s roughly 8,500 employees now find themselves hanging in limbo, too, even though government regulators now overseeing the operations have told them they will be offered jobs at 1.5 times their salaries for 45 days, said Rob McMillan, who had worked there for 32 years.

“We don’t know who’s going to pay us when,” McMillan said. “I think we all missed a paycheck. We don’t know if we have benefits.”

Even though all of Silicon Valley Bank’s depositors are being made whole, its demise is expected to leave a void in the technology sector that may be difficult to fill. In an essay that he posted on his LinkedIn page, prominent venture capitalist Michael Moritz compared Silicon Valley Bank to a “cherished local market where people behind the counters know the names of their customers, have a ready smile but still charge the going price when they sell a cut of meat.”

Silicon Valley Bank is fading away at a time when startups were already having a tougher go at raising money, with a downturn in technology stock values and a steady ride in interest rates caused venture capitalists to retrench. The bank often helped fill the financial gaps with one of its specialties — loans known as “venture debt” because it was woven into the funding provided by its venture capitalist customers.

“There’s going to be a lot of great ideas, a lot of great teams that don’t get funding because the barriers to entry are too high or because there are not enough people who are willing to invest,” said William Lin, co-founder of cybersecurity startup Symmetry Systems and a partner at the venture capital firm ForgePoint.

With Silicon Valley Bank gone and venture capitalists pulling in their reins, Lin expects there will be fewer startups getting money to pursue ideas in the same fields of technology. If that happens, he foresees a winnowing of competition that will eventually make the biggest tech companies even stronger than they already are.

“There’s a real day of reckoning coming in the startup world,” predicted Amit Yoran, CEO of the cybersecurity firm Tenable.

That may be true, but entrepreneurs like Lee and Kalb already feel like they had been through an emotional wringer after spending the weekend worrying that all their hard work would go down a drain if they couldn’t get their money out of Silicon Valley Bank.

“It was like being stuck inside a doomsday loop,” Lee said.

Even as he focuses on growing Shelf Engine’s business of helping grocers managing their food orders, he vowed not to forget “a very hard lesson.”

“I obviously now know banks aren’t as safe as I used to think they were,” he said.
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Stock markets in Asia fell Tuesday, with shares of banks hit particularly hard, following a decline in U.S. markets amid the fallout from the collapse of two U.S. banks. 

Japan’s Nikkei 225 Index closed down 2.2% with shares of Softbank falling 4.1%, Mizuho Financial Group dropping 7.1% and Sumitomo Mitsui Financial Group sinking 9.8%.  Hong Kong’s Hang Seng Index closed down 2.4% Tuesday. 

U.S President Joe Biden Monday sought to reassure Americans that the U.S. banking system is secure and that taxpayers would not bail out investors at California-based Silicon Valley Bank and the New York-based Signature Bank.    

“Americans can have confidence the banking system is safe. Your deposits are safe,” Biden said in a five-minute statement delivered at the White House.     

He said customers’ deposits will be covered by funds banks routinely pay into a U.S. government-held account for such emergencies.      

Biden vowed, “We must get a full accounting of what happened” at the two banks.     

Despite the assurances, U.S. banks lost about $90 billion in stock market value on Monday as investors feared additional bank failures. The biggest losses came from midsize banks, of the size of Silicon Valley Bank.     

While shares of the country’s biggest banks — such as JP Morgan Chase, Citigroup and Bank of America — also fell Monday, the selloff was not as sharp. The huge banks have been strictly regulated since the 2008 financial crisis and have been repeatedly stress tested by regulators.    

Biden ignored reporters’ questions Monday about the cause of the U.S. bank failures, but financial experts say both banks were affected by a rise in interest rates, which negatively affected the market values of significant portions of their assets, such as bonds and mortgage-backed securities.       

Banks don’t lose money if they hold such notes until maturity. But if they must sell them to cover depositor withdrawals, as was the case in recent days, the losses can quickly mount.       

The Federal Deposit Insurance Corp. reported that industrywide, U.S. banks at the end of last year reported $620 billion in such paper losses caused by rising interest rates.     

The U.S. Federal Reserve, the country’s central bank, announced Monday that it would review its oversight of Silicon Valley Bank in the wake of the bank’s failure.    

“We need to have humility and conduct a careful and thorough review of how we supervised and regulated this firm, and what we should learn from this experience,” said Fed vice chair for supervision Michael Barr.      

The FDIC, which insures deposits up to $250,000 and supervises financial institutions, said Monday it transferred all Silicon Valley Bank deposits to a so-called “bridge bank.” The new bank is run by a board appointed by the agency until it can stabilize operations.          

The Bank of England also announced Monday the sale of Silicon Valley Bank’s United Kingdom subsidiary to HSBC to stabilize the bank, “ensuring the continuity of banking services, minimizing disruption to the U.K. technology sector and supporting confidence in the financial system.”      

The actions were prompted by the failure of Silicon Valley Bank, which U.S. regulators seized on Friday after concerns about the bank’s financial health led to a large number of depositors withdrawing their money at the same time.          

With about $200 billion in assets, Silicon Valley Bank’s failure was the second largest in U.S. history. The bank was heavily involved in financing for venture capital firms, especially in the tech sector.            

Signature Bank also had a large portion of clients in the tech sector, including cryptocurrency.  Its failure, with more than $100 billion in assets, was the third largest in U.S. history, behind Washington Mutual and Silicon Valley Bank.           

Some information for this story came from The Associated Press, Agence France-Presse and Reuters. 
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