The collapse of Silicon Valley Bank sparked major concern in its consumer base that led people to pull their money which caused consequences.
Throughout history, situations like this recent banking crisis have happened and regulations were put on top of existing ones so things could get better. Still, people are worried about their funds.
Dr. Arturo Rodriguez is an associate professor of finance and director of the William D. Hoover School of Accounting, Financial and Information Services at the University of Louisiana at Monroe. He has been at the university since 2007. Dr. Eugenie Ardoin is an associate professor of finance at ULM as well and has been since 2013 after a career in banking.
On the banking crisis caused by the collapse of Silicon Valley Bank
Rodriguez: Banks take their customer's deposits and then lend that money to consumers or businesses who may need additional funding. Sometimes there is not enough lending activity so, they grab access funds and invest them in different securities such as treasuries, mortgage banks or collateralized mortgage obligations that are issued by the federal government.
In an environment where rates are increasing the value of those securities goes down and that causes stress in the bank's balance sheets. Not all securities are affected in the same way.
Securities that have longer terms are going to be affected more than those that are shorter. So if a bank has lots of securities with longer terms they are going to see a large decrease in their value when rates go up.
"When you have a lot of cash you have to do something with it."
On how the crisis happened
Rodriguez: Customers got wind that the bank was becoming insolvent and they got worried because they had large deposits that were above the insurance limit. In today's environment where social media is at everyone's disposal, information got compounded and everyone wanted their money out of the bank and couldn't get it.
Ardoin: SVB is one of the wealthiest banks in the United States and people were flush with cash after COVID. People were depositing all that money into the banks, but they didn't have a lot of loan opportunities.
Instead, people put money into treasury securities, but 90% of SVB's deposits were over the 250,000$ insurance limit from The Federal Deposit Insurance Corporation.
According to the Wall Street Journal, "On March 8, 42 billion dollars cash was withdrawn from Silicon Valley Bank in one day leaving the bank with a negative 1 billion dollars at the close of the day." Which made the FDIC shut it down.
" 90% of any deposits over the FDIC insurance rate should cause some concern."
On the rules and regulations of the Federal Reserve
Rodriguez: Most banks will have someone who is in charge of looking at risk factors and making sure they are managed properly. SVB didn't have a person in a risk management position for several years. Any assumptions that were made about what the future would look like were faulty as a result. So, when the environment changed and interest rates went up everything went awry.
Ardoin: The safe bet is treasuries. Yes, they lose value, but in the end, if you can wait 30 years you can get your money at value. When you have an interest rate environment where people are making a run on SVB and withdrawing all the money, the bank won't have all the funds because it has been loaned out or put in investments and that is what covers withdrawals.
All banks face this and the regulation has always been present. SVB is a state-regulated bank and the FDIC provides oversight. Typically, other federal agencies go with primary regulators. In this case, it was the state that was the primary regulator for SVB and that information is usually unknown to the public.
On whether this is a partisan issue
Rodriguez: When things go wrong the problem will always be looked at through a political lens. This crisis was a regulatory issue, regulations change and corporations adapt to those changes. It is all about how you manage the risks.
"The fear was that everyone would overreact and start moving their money out of banks. That has happened at several of them."
On the risks of a banking crisis in the economy right now
Ardoin: As long as the federal government is raising the interest rates and banks are locked into these long-term treasuries or investments they will have to deal with the risks. These risks are typically monitored on an ongoing basis. All banks will have to start looking closer at their interest rate risks.
On steps citizens can take to protect their bank accounts
Rodriguez: People can diversify where they are putting their money. If they have cash that is above the insurance rate limit, they can move some of that to different banks. That way those deposits can be insured.