SVB and Signature Were Highly Exposed to Risk of a Bank Run

In an attempt to contain the damage from last week’s collapse of Silicon Valley Bank (SVB) and to strengthen public confidence in the banking system, regulators stepped up on Sunday, guaranteeing that all of the bank’s depositors would be fully protected. In a joint statement published late Sunday, the Department of the Treasury, the Federal Reserve and the FDIC announced that depositors would have access to all of their money on Monday, including deposits in excess of the $250,000 limit typically insured by the FDIC. The same guarantees will be offered to customers of Signature Bank, whose closure the regulators also announced on Sunday, citing systemic risk.

Silicon Valley Bank was shuttered on Friday in the second-largest bank failure ever in the U.S. after the self-declared “financial partner of the innovation economy” had announced plans to raise fresh capital and the (fire-)sale of a substantial share of its securities portfolio. This de-facto admission of trouble had triggered a run on the bank’s deposits, which ultimately resulted in its downfall. As SVB mostly catered to startups and other companies rather than private customers, the vast majority of deposits exceeded the $250,000 limit for FDIC insurance, meaning they were (partly) unprotected. Knowing that, SVB’s customers would always take their money and run at the first signs of trouble, and sure enough they did. According to a regulatory filing, depositors initiated $42 billion in withdrawals last Thursday, which ultimately let to the bank’s collapse.

As the following chart, based on data from S&P Global Market Intelligence, shows, both SVB and Signature Bank had a disproportionately low share of deposits smaller than $250,000, i.e. fully protected by the FDIC. That left the vast majority of their depositors at risk in case of serious trouble, which exposed both banks to the risk of a bank run.