Silicon Valley Bank
On Friday, March 10, 2023, Silicon Valley Bank collapsed. Silicon Valley Bank (SVB) was the 16th largest bank in the United States, and its collapse was the second largest bank collapse in United States history.
How Did SVB End Up Here?
Over the span of just a couple of days, thousands of SVB’s customers transferred their money out of SVB. Similarly, to Bailey Building and Loan bank in It’s a Wonderful Life, SVB experienced a bank run. The downfall of SVB happened, seemingly, through little to no fault of its own. SVB invested heavily in US government bonds, which historically, have been amongst some of the safest investments one could make. However, as interest rates across the country began to rise dramatically, the value of the bonds began to plummet. So, SVB’s large bond portfolio began to diminish in value. In response, bank depositors began to withdraw and transfer their money out of SVB at an unprecedented rate.
Banks make money through investing the money of their depositors. They quite literally must take out more liabilities than what they have liquid assets to cover. This is how banks make a profit and how their depositors earn money through a small interest rate on their bank accounts. Banks invest in all sorts of investments, everything from offering mortgages to young families, or small business loans to start up corporations to seeding their money into large multinational conglomerates. In consequence, when a large portion of the bank’s depositors withdraw or transfer their money out of the bank, the bank does not have the liquid assets to return to their depositors. This generally leads to bank insolvency and bankruptcy of the holding company.
Bank Insolvency
According to 11 US Code § 109(b)(2), a bank does not qualify for bankruptcy under Chapter 7, or Chapter 11 under 11 US Code § 109(d). Chapter 7 is the bankruptcy chapter which allows for an individual or organization to liquidate their assets to pay their creditors. Chapter 11 is the bankruptcy chapter which allows for a business to “reorganize” themselves but allows the owners or board to retain primary control of day-to-day operations while creating a plan to repay creditors. These bankruptcy processes are controlled by the bankruptcy courts of the judiciary branch. Individual creditors, as well as trustees under Chapter 7, play an intricate and determinate role in each of these processes.
Banks do not qualify for bankruptcy, but banks can become insolvent. Insolvency occurs when a bank is unable to repay its depositors because the liabilities it holds are greater than the assets it holds, particularly liquid assets. Unlike bankruptcy, insolvency is controlled by the Federal Deposit Insurance Corporation (FDIC), rather than the judiciary. The FDIC has control over the insolvency process because insolvency is a highly regulated process designed to deal with failures of banks and other financial institutions. The FDIC was instituted to handle issues of insolvency because for financial institutions like banks, who manage so much of the public’s money, the federal government wanted to ensure the fate of the public’s money was not left to individual creditors or trustees of a bankruptcy estate. The FDIC retains much more control over the insolvency process than would a regular bankruptcy creditor.
Holding Company Bankruptcy:
Banks are unable to declare bankruptcy, but the holding companies, often referred to as “parent companies,” can declare bankruptcy. In the case of SVB, the Wall Street Journal has already announced that creditors of SVB’s holding company, Silicon Valley Bank Financial Group (SVBFG), have already formed a group in anticipation of a potential bankruptcy filing. Since SVB is the largest asset of SVBFG, bankruptcy makes financial sense. Without SVB, SVBFG likely does not have enough assets to balance against the liabilities owed to their creditors.
The majority of bankruptcies that occur for holding companies are either under Chapter 7 or Chapter 11. Bankruptcies can be formed by voluntary petitions, in which the debtor voluntarily files for bankruptcy, or involuntary petitions, in which a group of creditors force a debtor into bankruptcy. It is unclear which route SVBFG will choose to pursue if the necessity of bankruptcy becomes clear. As stated above, SVB was SVBFG’s greatest asset; however, SVBFG does have other assets which potential buyers might find enticing, and could be sold under Chapter 7. If forced into bankruptcy by its creditors, it is probable those creditors would not want to enable the leaders of SVB to continue to operate the bank’s day-to-day business, as they would be entitled to under Chapter 11.
What will be the Fate of SVB?
On March 17, 2023, SVBFG filed a chapter 11 bankruptcy.
Thankfully, for the depositors of SVB, the future appears to be bright. The FDIC insures each individual depositor account up to $250,000. Although most of the depositors at SVB held funds well in excess of the $250,000 limit, the FDIC announced that all SVB’s deposits, insured or uninsured, would be transferred from SVB to a newly created ‘bridge bank’ that would be fully operated by the FDIC. This may ensure all of SVB’s depositors may have full access to their money. This does substantially differentiate from the FDIC’s $250,000 policy, but likely brings great relief to SVB depositors. The FDIC has ensured the banks who fund the FDIC insurance system will “foot the bill” of the SVB failure and that general taxpayers will not be affected; however, the funds used to cover the uninsured deposits are to be funded by the new Bank Term Funding Program (BTFP) which is set to be at least partially funded by up to $25 billion from the United States Treasury’s Exchange Stabilization Fund (ESF). Only time will tell how this situation will end up playing out.
Written by Marley Smith-Peters
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