Within the past month, two American bank failures have sent shockwaves through the banking industry. These failures triggered rapid government intervention and a heightened fear of more bank failures.
In early March, Silicon Valley Bank (SVB), located in Santa Clara, California, failed after a bank run caused it to liquidate assets that it didn’t have. When banks receive deposits, they typically loan out that money with interest in order to generate income. However, SVB did something a little different.
“SVB decided to invest it in treasury bonds that were backed by mortgages, which were theoretically very safe,” said senior Cesar Aguzzi, co-president of Notre Dame’s Wall Street Club. “But when interest rates started going up, the value of the bonds went down. Within 48 hours of announcing a liquidity loss, a bank run happened. Venture capitalist companies took their money out of SVB, so they had to liquidate their assets and sell their bonds at a loss.”
The collapse of the SVB is the biggest bank failure since the 2008 financial crisis. The Federal Deposit Insurance Corporation (FDIC), in order to avoid a repeat of 2008, quickly transferred all of SVB’s assets to a newly created, FDIC-run “bridge bank.”
In Aguzzi’s view, many other banks would have collapsed without this FDIC intervention.
“The government had to step in and secure all of SVB’s deposits,” Aguzzi said. “If they hadn’t insured SVB client deposits, a whole list of American banks would have collapsed.”
American banks would not have been the only type of business to foreclose without rapid government intervention, he added.
The FDIC typically only insures deposits up to $250,000 for all insured bank accounts, as would have been the case for SVB without further intervention. Many of SVB’s depositors were venture capitalists, startup companies or entrepreneurs who had millions of dollars in the bank. When SVB collapsed, these clients were unable to retrieve a large portion of their assets.
“At first, there was the thought that some of these founders with money at SVB almost surely were going to not have money anymore,” said Jason Reed, director of finance undergraduate studies in Mendoza. “But because the government was able to step in, I think everyone has kind of been saved there.”
Despite the government’s rapid effort, Signature Bank in New York collapsed shortly after SVB’s crash.
“Everyone’s worried that these banks are dominoes, and that when one falls, that signals that all the others are on their way down as well,” Reed said.
The bank failure may still extend to smaller regional banks, Reed added.
“A lot of regional banks are going to be in the same exact position as SVB because they’ve invested their depositors money into what they thought were incredibly safe assets,” Reed said. “But the problem is once depositors start trying to pull their money out, and they can’t then liquidate those assets because there’s no market for them. That’s when you get these failures occurring.”
The failures of SVB and Signature Bank, both smaller regional banks, have seeded doubts for many Americans, who have moved their money to larger banks in the last week. It’s possible that this doubtful behavior could lead to a market decline as banks forego interest revenue to ensure customers have access to deposits, Reed said.
“The SVB crash puts everything under a microscope, and everyone is going to be second guessing,” Reed said. “And what that does in some capacity is limit the amount of lending that happens. So if everyone is really worried about money being drawn out, whatever reserves that a bank has are going to be held on to. The opportunity cost of that is lending it out and then generating interest on loans.”
Reed said the banking crisis will likely not lead to further losses for Notre Dame’s endowment, which lost $1.4 billion last fiscal year.
“Over the last year, if you look at the overall broader public equity market, if you look at the drying up of capital, deployment of capital in private equity and venture, everyone was preparing for a downturn in some capacity,” Reed said. “The assets that Notre Dame holds are just a symptom of the broader market and economic decline, and they’re not a result of any specific decisions that partners are making.”
Reed added that Notre Dame’s investment strategy is focused on the long term.
“The University is thought ... to be infinitely lived in some ways, in that as long as we generate some return that we’re getting on our investment, we don’t need to pull that money out for any reason,” said Reed. “So the University can withstand short-term losses really well.”
