Silicon Valley Bank collapsed last week at lightning speed, followed by two other banks, Silvergate Capital and Signature Bank, which were heavily exposed to crypto. Although U.S. banking regulators took emergency measures to stop the risk of contagion, many are wondering what could happen next, and who might follow the same path as the three aforementioned banks.
The Ten Biggest Bank Failures Since 2001
The last time a major banking collapse occurred, it was followed by a flood of bank shutdowns. After banks reported billions in losses from subprime mortgages at the end of 2007, the mood began to change. As losses grew in 2008, it triggered an assault on shadow banks – institutions that are not regulated like banks but perform similar actions. At that time, both banks and shadow banks held acquired mortgages as collateral. It was also difficult to determine the value of those assets, and the credit crisis sparked a wave of bank failures. During the financial crisis of 2008, the largest bank bankruptcy occurred with Washington Mutual, which closed with $307 billion in assets and $188 billion in deposits.
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The banks that failed in recent days held U.S. Treasury bonds as collateral. Their value fell as interest rates surged. Their customer base is also concentrated, reducing diversification. Just as Silicon Valley Bank served a niche clientele of tech startups backed by entrepreneurs, Silvergate Capital primarily worked with high-risk crypto companies. Since these banks invested deposits in long-term bonds when interest rates were historically low, it reflected poor risk management and the assumption that interest rates would remain at those levels, which did not happen.
What Is Happening Now?
U.S. banking regulators have shown they are serious about preventing future repercussions. The Federal Reserve, the U.S. Department of the Treasury, and the FDIC took emergency measures to allow all depositors of Silicon Valley Bank and Signature Bank access to their funds. JPMorgan Chase, Morgan Stanley, and the Royal Bank of Canada are among the banks that initially showed interest but withdrew after conducting due diligence. Regulators took swift action to pay out depositors, stating that Silicon Valley Bank and Signature also led to a ‘similar systemic risk exception.’ Although neither bank was on the list of systemically important banks by the Financial Stability Board, regulators still took action.
