The collapse of the Silicon Valley bank: a one-time disaster or a sign of new problems for California?

On Friday morning, California experienced something the country had not seen since the 2008 financial crisis: the collapse of a major bank.

California regulators have seized Silicon Valley Bank — the legendary cornerstone of the startup economy and, as of last year, the nation’s 16th largest bank — declaring it “doing business in an unsafe manner” and insolvent.

The bank plans to reopen on Monday under the guidance of banking regulators from the Federal Deposit Insurance Corporation, which announced late Sunday that it plans to guarantee all deposits. He took the move in response to panic in the Bay Area that businesses and non-profits with millions of dollars in the bankrupt bank’s vaults might not be able to access their money and would be forced to close.

Now, Silicon Valley investors, budding employers, California fiscal analysts and lawmakers are keeping a close eye on whether this is the end of a minor crisis or just the beginning of a major crisis fueled by higher interest rates.

Gov. Gavin Newsom welcomed the federal intervention Sunday afternoon, saying in a statement that it will have “a profoundly positive impact on California… ensuring that our innovative economy can continue to grow and move forward.”

Meanwhile, a spokesman for the Newsom administration’s Treasury Department said it was too early to tell how the bank failure and its attendant economic fallout could affect the state’s already drawn-out fiscal picture.

The sudden demise of Silicon Valley Bank will be studied and discussed for weeks and months. But for all the bank’s connection to innovation and newfangled technology, the factors that led to its collapse, according to Bloomberg columnist Matt Levin, seemed “kind of boring and normal” when it comes to bank failures.

In short: depositors began withdrawing money just as the bank’s investment began to fall.

As for savers, most of the bank’s money came from startups and other Silicon Valley savers. With higher borrowing rates and the end of the pandemic surge in demand for everything remote, there has been a wave of layoffs in Silicon Valley this year, with bank depositors withdrawing their savings. Higher interest rates have also prompted many of these savers to seek higher returns elsewhere.

This drawdown required the bank to cash out some of its investment. Unfortunately for the bank, many of them were in long-term Treasuries and mortgage-backed securities. As the Federal Reserve raised interest rates to quell inflation, the value of these assets plummeted. So, on Wednesday the bank announced losses in the amount of $1.8 billion.

Frightened by this news, many depositors tried to withdraw all their money at once. $42 billion disappeared from the bank’s digital vaults the next day, according to California regulators. This run was driven by some giants in the tech sector, including a venture capital fund co-founded by conservative billionaire Peter Thiel.

The result: an old-fashioned bank that even Jimmy Stewart would recognize.

Victim of anti-inflationary policy

Some commentators were less supportive of the former bank, arguing that the bank’s management did little to appease fearful investors, leading to an own goal of epic proportions.

Since the bank’s financial problems can be attributed to higher interest rates, the Silicon Valley Bank can be called the first major victim of the Federal Reserve’s anti-inflationary policy.

The big question is whether it will be the last. After the federal takeover, investors fled similarly positioned regional banks, fearing they, too, could face lower borrowing rates.

Those with cash in Silicon Valley Bank were protected, but only up to a point. The Federal Deposit Insurance Corporation supports deposits up to $250,000. This was unlikely to help the bank’s many clients, disproportionately made up of million-dollar startups.

It was this frightening prospect of tech companies across northern California suddenly being cashless and unable to pay wages that ultimately led the federal government to intervene.

One venture capitalist warned about “mass closure of all American startups“. Reports over the weekend highlighted the potential collateral damage that could befall everything from affordable housing projects to Napa’s wine industry and solar panel manufacturers. Bay Area politicians urged urgent federal action.

On CBS Face the Nation On Sunday morning, Silicon Valley spokesman Ro Hanna urged the federal government to ensure that “all depositors are protected and have full access to their accounts.”

“If, in theory, the federal government did nothing, we would be at risk of contagion and its spread would be very bad,” said state senator Scott Wiener, a Democrat of San Francisco, before the announcement by federal regulators.

This announcement was made on a Sunday afternoon. “Depositors will have access to all their money starting Monday, March 13,” FDIC Chairman Martin J. Grunberg said in a joint statement with Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome H. Powell.

It’s an unusual decision for a bank to fail, said Joao Granja, an accounting professor specializing in banking regulation at the University of Chicago. Typically, federal regulators try to find another private bank to replace the failed one by guaranteeing all of its deposits.

The fact that no buyer showed up immediately reflects both “how suddenly and quickly the situation has unfolded,” Granja said, and that Silicon Valley Bank is “large and specialized” in the tech sector.

What Silicon Valley Means for California’s Budget

The government as a whole doesn’t need to panic just yet, said Emily Mandel, an economist who tracks public finances for Moody’s Analytics. The collapse of the bank is “more of a symptom of the ongoing weakness of the technology industry than a major change,” she said.

Still, California lawmakers are facing a deficit of more than $20 billion. Approximately half of the state’s income tax revenue comes from the top 1% of employees, most of whom are paid in stocks and other financial instruments. That’s why the possibility of additional disruptions in the technology sector and fluctuations in the financial market is unlikely to be welcome news in the Capitol.

An analysis by the non-partisan Legislative Think Tank last year found that the total amount of income tax withheld from California payrolls was much lower than expected. The culprit, according to the report: the drastic decline in salary bonuses and the lack of new initial public offerings are the stock exchanges, which just a few years ago regularly made new tech millionaires across the bay.

But to the extent that the Silicon Valley Bank epic reflects the underlying unsustainability of technology, those concerns are likely already reflected in the state’s dire financial outlook, Mandel said.

“Yes, the weakness of technology will lead to some decrease in revenue, but this does not change the contours of what we expect,” she said. “I don’t expect it to be a repeat of 2008, I expect it to be more of an isolated event.”

Public sector retirees are also unlikely to be affected in the short term. Of the approximately $444 billion in investments currently managed by the California Public Employees’ Retirement System, $67 million (about two percent of one percent of the total) was Silicon Valley Bank bonds, according to the fund’s investment summary through June. 2022. More recent data is not yet available.

Wider noises in the tech world will weigh on the pension fund portfolio, but risk is still relatively limited. Bringing together Apple, Alphabet, Amazon, Meta and Microsoft, CalPERS holds $1.7 billion in corporate bonds.

California Department of the Treasury spokesman H.D. Palmer emphasized that the collapse of one bank, while painful for those directly involved, would not by itself shake a large state like California.

“Is this endemic? Is this a problem that 10 other banks face?” He said. “What we know so far doesn’t even come close to that type of projection.”