Q&A: Recent Bank Failures Do Not Mean It’s 2008 All Over Again
By Bryan McKenzie
In the last seven days, the Federal Deposit Insurance Corporation — best known by its initials, FDIC — took over two banks a country apart after customers ran to get their money out in fear of their imminent closure.
The federal takeover has fueled fear among some that the failures are precursors to something akin to the Great Recession, when 450 banks failed between 2008 and 2012.
To find out what happened, why and what’s next, UVA Today turned to David C. Smith, the Virginia Bankers Association Professor of Commerce at the University of Virginia’s McIntire School of Commerce, and Robert F. Bruner, dean emeritus of UVA’s Darden School of Business and a senior fellow at the Miller Center for Public Affairs.
Q. What led to the takeovers of Silicon Valley Bank in California and Signature Bank in New York?
Smith: The Silicon Valley Bank, or SVB, invested heavily in relatively “safe” assets, in that the investments had little or no likelihood of default. But the assets wouldn’t pay back for a long time, mostly 10 years or more. Meantime, the bank funded these assets with checking and savings deposits from customers who could demand their money back immediately, meaning the liabilities against the bank were very short-term.
Most of SVB’s deposits were from Silicon Valley startup companies and their venture capital backers, who parked money at the bank that the companies used for day-to-day operations, including paying employees. As the tech sector slowed at the end of 2022 and start of 2023, many startups had to rely on these deposits to cover their day-to-day needs without replenishing the funds.
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