On March 10th, 2023, Silicon Valley Bank (“SVB”) collapsed, marking the greatest bank failure since the 2008 recession.[1] SVB’s place in the market is particularly important because its clients were comprised mainly of start-ups and venture capital.[2] Its financial services allowed budding companies to lay a foundation and provide a good or service that could change the lives of Americans across the country. SVB’s gross revenue in 2022 was just shy of $7.4 billion.[3] This puts it on par with other financial giants like American Express and Citizen Financial Group.[4] Therefore, SVB’s status as a financial powerhouse cannot be understated.
SVB’s collapse was a classic bank run.[5] This means that, within a very short period of time, a disproportionately large number of investors withdrew their money from SVB.[6] As a result, the bank is very likely to default because the bank does not actually have the sufficient funds to cover every investor’s withdraw request at any given time.[7] This begs the question of whether a government bailout is appropriate in these circumstances in order to keep financial institutions afloat, especially those that serve a niche market of clients. There already exists agencies like the FDIC that protect individual investors’ funds in the case that financial institutions do fail. Should the same be guaranteed for financial institutions?
Government Bailouts
A government bailout occurs when the government decides to inject capital to save a company that would otherwise become bankrupt.[8] The government typically decides to engage in a bailout if the company facing financial trouble is particularly important to the overall economy.[9] The capital injection may come in the form of a loan, cash, bonds, or stock, depending on what the government deems appropriate to save the company without overly enriching the company.[10]
While government bailouts are a great way to maintain the status quo and prevent financial spiraling, there are several arguments suggesting that government bailouts should be used sparingly. The first argument is that the capital injection may come directly from taxpayer funds.[11] If this is the case, critics argue that this is a zero-sum game because non-investors are forced to supplement the funds taken out by the bank’s investors.[12] In addition, using taxpayer money to keep banks afloat may result in general loss of trust from taxpayers in the general health of private financial institutions.[13] The second argument is that the bailout itself may not even work.[14] Arguably, this would involve a waste of taxpayer money and result in a loss of consumers’ confidence in financial institutions. The third argument is that the bailout might be motivated by political reasons, not financial ones.[15] Furthermore even if political reasons are not the reason for the bailout, the public may perceive them to be, resulting in damage to public confidence in institutional bailouts.[16]
SVB’s Situation
When SVB collapsed, the government’s plan was to bail out SVB’s investors, not the institution itself.[17] This is contrary to the government’s position that they would bail out banks if the bank’s failure would jeopardize the health of the national economy.[18] For example, in the 2008 crisis, the government created the Troubled Asset Relief Program (TARP) which set aside $700 billion to help troubled banks.[19]
Although a government bailout wouldn’t be inappropriate in this case, the government ultimately made the right choice in choosing not to bail out SVB. That is because SVB was subsequently subject to private bail outs.[20] SVB’s assets and loans are currently being bought out First Citizens BancShares while HSBC announced it was buying SVB’s U.K. subsidiary, SVB Bridge Bank.[21] This comes after the government had promised SVB investors that their assets would be protected up to the FDIC $250,000 maximum.[22] First Citizens Bank agreed to buy $72 billion of SVB’s assets at a $16.5 billion discount.[23] All of SVB’s customers would then become customers of First Citizens banks.[24] As a result, this relieves some of the burden the government would face had it needed to insure all investors’ accounts. HSBC also agreed to big on SVB’s U.K. subsidiary for a whopping £1.[25] This came after HSBC realized there were no other bidders for SVB’s U.K. subsidiary.[26] However, this is a reasonable purchase for HSBC. Aside from being a popular retail bank in England and much of Asia, HSBC also has a division dedicated to start-up customers, the same clientele that SVB relied so heavily on.[27]
Market Forces Come to Rest
What SVB’s collapse shows the world is that there are two saving graces when banks face financial failure: the government and other private banks. The result of a bailout coming from each is the same. Customers of the failing bank get to live another day. However, the interests of each are drastically different. The government’s main interest in a bailout is maintaining the viability of the national economy while other banks are primarily motivated by increased profit. This is evident of market forces at work. Both parties are applying their risk tolerance to determine whether there’s space in the market for the continued operation of the failed bank. While banks cannot always be sure that there will be a saving grace, such chances do increase if they are vital players to the banking market.
[1] See Vivian Giang & Mike Dang, 10 Days That Have Roiled Markets: A Timeline of the Banking Chaos, N.Y. Times (Mar. 20, 2023), https://www.nytimes.com/article/svb-silicon-valley-bank-collapse-timeline.html.
[2] E. Scott Reckard, At Silicon Valley Bank, risky tech start-ups are lucrative business, L.A. Times (Aug. 8, 2015), https://www.latimes.com/business/la-fi-silicon-valley-bank-20150807-story.html.
[3] Ch Daniel, Silicon Valley Bank (SVB) Revenue and Financial Statistics Signhouse (Mar. 13, 2023), https://www.usesignhouse.com/blog/silicon-valley-bank-stats.
[4] FDIC, FDIC Quaterly, https://www.fdic.gov/analysis/quarterly-banking-profile/fdic-quarterly/index.html (last visited Apr. 6, 2023).
[5] Erin Gobler, What Happened to Silicon Valley Bank?, Investopedia (Mar. 27, 2023), https://www.investopedia.com/what-happened-to-silicon-valley-bank-7368676.
[6] Adam Hayes, What Is a Bank Run? Definition, Examples, and How It Works, Investopedia (Mar. 14, 2023), https://www.investopedia.com/terms/b/bankrun.asp.
[7] René Bennett, What banks do with your money after you deposit it, Bankrate (Mar. 16, 2023), https://www.bankrate.com/banking/what-banks-do-with-deposits/.
[8] Alexandra Twin, What Is a Bailout? Definition, How They Work, and Example, Investopedia (Mar. 16, 2023), https://www.investopedia.com/terms/b/bailout.asp.
[9] Id.
[10] Id.
[11] Hal S. Scott, Criticisms of Bailouts Generally, MIT Press COVID-19 (Apr. 8, 2023), https://covid-19.mitpress.mit.edu/pub/vf54oo8p/release/1.
[12] Christopher Rugaber, Will Americans end up footing the bill for bank failures?, Abc7ny (Mar. 17, 2023), https://abc7ny.com/us-bank-collapse-banks-who-pays-fdic-bailout-svb/12967836/.
[13] Id.
[14] Scott, supra note 11.
[15] Id.
[16] Id.
[17] Victor Ordonez, A bailout or not? Did the federal government bailout Silicon Valley Bank and Signature Bank?, ABC News (Mar 15, 2023), https://abcnews.go.com/Business/bailout-federal-government-bailout-silicon-valley-bank-signature/story?id=97846142.
[18] Karen Bennet, What is a bank bailout?, Bankrate (Mar. 20, 2023), https://www.bankrate.com/banking/what-is-a-bank-bailout/.
[19] Id.
[20] Peter Hoskins & Nick Edser, Silicon Valley Bank: Collapsed US lender bought by rival, BBC (Mar. 27, 2023), https://www.bbc.com/news/business-65084248.
[21] HSBC Acquires Silicon Valley Bank UK Limited, HSBC (Mar. 13, 2023), https://www.hsbc.com/news-and-media/media-releases/2023/hsbc-acquires-silicon-valley-bank-uk-limited.
[22] Stan Choe, Deal to buy Silicon Valley Bank calms bank fears, for now, AP News (Mar. 27, 2023), https://apnews.com/article/svb-banks-fdic-first-citizen-silicon-f6958f1fa87b0991cb525b0424c7a1cd.
[23] Id.
[24] Id.
[25] Stephen Morris & Owen Walker, Why HSBC swooped on SVB UK, Fin. Times (Mar. 15, 2023), https://www.ft.com/content/1675cb2d-7e53-4bd2-9e2d-2fa33056b28c.
[26] Id.
[27] ABLadvisor, HSBC Bank Provides Venture Debt Financing to Overhaul, ABLAdvisor (Mar. 25, 2022), https://www.abladvisor.com/news/33616/hsbc-bank-provides-venture-debt-financing-to-overhaul.
