On Friday, March 11th, 2023, the Federal Deposit Insurance Corporation (FDIC) took over Silicon Valley Bank (SVC) located in California and it was officially declared “failed.” The takeover by the FDIC/regulators is planned and is part of the playbook the United States Federal government developed decades ago to prevent another Black Tuesday, also known as the Wall Street Crash of 1929. How exactly does the takeover prevent such a thing? And what does it mean for the overall financial climate, which is closely tied to the banking industry, in the future? This article will give an overview of these topics.
By taking over SVB the FDIC is hoping to prevent “contagion.” This term, when applied to the banking industry, describes a systemic failure of most/all banks because of their investments and financial transactions between/among each other. The government has communicated that “all deposits at SVB” will be accessible in the hopes that ultimately only SVB will fail and the rest of the banking industry will continue business as usual. Will it work? The answer to that question is cloudy because the future is yet to be seen but unfortunately the plan has not been 100% successful so far.
Not long after regulators took over SVB news came out that Signature Bank (of New York) was also taken over by regulators for the same reasons: a failure was imminent and regulators wanted to assure the depositors that they would have access to their deposits. These two takeovers represent the second and third biggest bank failures in US history. Regulators are trying to contain the fallout and prevent any further bank failures (aka contagion) such as First Republic Bank (of California), which is teetering on failure too. European bank Credit Suisse also suffered major losses on during the week after the SVB takeover; down 17+% over the previous 5 days, down 30+% over the previous 30 days, and down 60+% over the previous 6 months.
Why are banks continuing to fail even after swift action by regulators and assurances that depositors will not lose their deposits/money? Financial experts point to the fact that even in modern times the banking industry relies much on trust; trust between banks and trust between the banking industry and the public. General knowledge dictates trust takes a long time to build up, so when it is damaged, it takes a long time to repair/build up again. Until that trust is built back up, expect the current and future financial climate to experience some “choppy waters.”