In the whirlwind around the collapse of Silicon Valley Bank (SVB) on March 10 and Signature Bank on March 12, there has been a backdrop of anxiety: Does this foretell a global economic disaster, akin to the bankruptcy of Lehman Brothers in September 2008?
In recent days, global stock markets have reflected this fear. Stocks of individual banks, especially smaller ones like First Republic Bank, tumbled, although some have begun to recover. And the jitters weren’t confined to the U.S.; markets from London to Singapore retreated in the wake of SVB’s collapse.
There is a logic to the fear, given that SVB is the second-largest bank failure in U.S. history. Moreover, the presumed cause of its demise was that the bank was holding large amounts of U.S. Treasury securities, the value of which has declined since the Federal Reserve began its recent series of interest rate hikes. It is reasonable to assume that there are other banks in a similar situation, and when there is a run on one bank it can affect the industry as a whole.
And yet, many economists believe that the collapse of SVB does not pose a major threat to the broader financial world. “This is nothing like Lehman,” says Dean Baker, senior economist at the Center for Economic and Policy Research. He points out that in 2008, banks had trillions of dollars invested in mortgage-backed assets with little underlying value.
Today, banks are much better insulated from losses in their portfolio
“There is nothing remotely comparable today,” Baker argues. “Long-term bonds, purchased at the low points for interest rates in 2020-21, have lost 10-15 percent of their value. No bank has all their assets in these bonds. Given higher capital requirements, most banks should be able to easily withstand a loss of this size on 20-30 percent of their portfolio.”
One argument against contagion is that SVB was something of a singular institution. SVB was only the 16th largest bank in the country. Its sizable assets came largely from venture-capital funded tech startups. It appears that the bulk of its assets were longer-term bonds, and that almost all its liabilities were in the form of uninsured deposits that could easily flee.
On the other hand, SVB reached into the financial world further than was obvious. For example, in 2021, SVB acquired Boston Private, a Massachusetts-based bank with many ties to local customers and businesses. This past weekend, there were long lines outside Boston Private branches, as customers worried whether they would lose access to their accounts.
Similarly, the San Francisco-based human resources and payroll company Rippling used SVB as a banking partner to process payments. In recent days, Rippling sent out messages labeled URGENT to its customers, warning them that their payroll checks were at risk if they didn’t switch to a new provider immediately.
Presumably, however, since it was announced that SVB accounts will be restored in full, these secondary effects will not have much permanent economic impact.
Baker, for one, credits the Federal Deposit Insurance Corporation’s actions with containing the fear that could create broader economic harm. “I think they did what they had to do,” he says. “They needed to give people assurances that their money was safe. There are longer term issues that have to be dealt with, like are all deposits now insured, and if so, will we impose new restrictions on banks to limit moral hazard, but I think they stemmed the panic.”