ERIE, Pa. — The rapid collapse of Silicon Valley Bank, which lost approximately $40 billion on March 9, sent the financial sector into a defensive crouch. The stocks of other banks tumbled, both in the United States and abroad. After a brief rebound, many fell again, including Credit Suisse, which lost 24% of its value. Bank-related jitters pulled the S&P 500 down 2%.
For the average investor, however, the risks are minimal, said Greg Filbeck, director of the Black School of Business at Penn State Behrend and the Samuel Patton Black III Chair in finance and risk management at the college.
“I don’t think individual investors need to be overly concerned,” he said. “The Federal Deposit Insurance Corporation insures deposits up to $250,000, which is well beyond what most individuals or families have in their bank accounts. And federal regulators, including the U.S. Treasury and the Federal Reserve, stepped in and took immediate action, adding new safeguards. I think we’re going to be fine.”
In the Q&A below, Filbeck discusses the collapse of Silicon Valley Bank; the failure, days later, of Signature Bank, which had invested heavily in cryptocurrency; and the next steps for the Federal Reserve, which has been raising interest rates in an effort to stem inflation.
Q: Silicon Valley Bank was the 16th-largest bank in the United States, with deposits of more than $189 billion at the end of 2021. Its stock price tripled from 2018 to 2021. What went wrong?
Filbeck: There are a lot of folks you can point fingers at, but the root cause of this was a series of very bad decisions by the people in charge at that bank. They could not have made worse decisions.
Basically, a bank really needs to be concerned about and attentive to interest-rate management. Silicon Valley didn’t do that. They went several months without a risk manager, and they invested far too heavily in longer-term instruments.
Q: Meaning what, exactly?
Filbeck: They put too much of their money in long-term bonds issued by the government. For years, that was a pretty safe bet, and a good way to earn higher interest. But it does tie up the money, so you don’t have as much flexibility if, for example, depositors sense something is wrong and come to close out their accounts.
The worst part was that was happening as Jerome Powell, the chair of the Federal Reserve, was shouting from the rooftop that interest rates were going to go up, which would weaken the value of their longer-term bond holdings because of the inverse relationship between interest rates and bond prices. The bank knew this was coming.
When this happened at Silicon Valley Bank, they tried to sell the longer-term bonds at a loss. That essentially led to insolvency.
Q: Signature Bank was the next domino to fall. Why did the FDIC take over there?
Filbeck: The regulators had to step in and put an end to any concerns about deposits at other banks. Signature had just 5% of its assets in cash, which was well below the industry average.
Q: Are you worried about contagion? Bank stocks are really taking a hit this week.
Filbeck: Contagion comes in two forms. One is the reaction we’ve seen on social media, with people warning, “You’d better get your money out now.” That’s hard to control, and it’s a big reason the government took action. They wanted to show there are safeguards in place that limit the risk for most investors.
The second type of contagion could come from the relationships between banks. A lot of these banks lend to each other. If a bank fails, any bank that has holdings or obligations there could be exposed. Ultimately, what the Treasury, the Federal Reserve and the FDIC did should limit the risk there.
Q: What makes you believe that?
Filbeck: They’ve added another safety net. The new Bank Term Funding Program offers one-year loans to banks, credit unions and similar institutions. Those loans are based on the face value of the bank’s security, rather than the market value. That gives banks a second chance on interest-rate management.
Q: Does this complicate the next steps for the Federal Reserve, which has been so focused on stemming inflation and keeping the nation out of a recession?
Filbeck: It could. This entire episode has exposed some weaknesses within segments of the banking industry, and you never want to see that. It helps that regulators were so quick to step in, and that they added a new level of protection, with the Bank Term Funding Program.
A lot of analysts have thought that, going forward, these rate hikes were likely to stop anyway. There was a general sense that by the end of 2023, we wouldn’t still be trying to curb inflation but would be working instead to make sure that we don’t go into a recession.