On Friday morning, California saw something the country hasn鈥檛 witnessed since the bad old days of the 2008 financial crisis: the collapse of a major bank.
California regulators seized Silicon Valley Bank 鈥� a storied cornerstone of the start-up economy, and, as of last year, the country鈥檚 16th largest bank 鈥� declaring it to be 鈥渃onducting its business in an unsafe manner鈥� and insolvent.
The bank reopened Monday under the stewardship of bank regulators with the Federal Deposit Insurance Corporation, which announced late Sunday that it . It took that step in response to panic across the Bay Area that businesses and nonprofits with millions of dollars in the failed bank鈥檚 vaults might be unable to access their cash and be forced to shutter.
Now, Silicon Valley investors, start-up employers, California budget analysts and lawmakers are watching closely to see whether this is the end of a minor crisis 鈥� or just the beginning of a major one .
Gov. Gavin Newsom welcomed the Sunday afternoon federal intervention, saying in a statement that it will have 鈥減rofoundly positive impacts on California 鈥� ensuring our innovation economy can continue to grow and move forward.鈥�
Meanwhile, a spokesperson for the Newsom administration鈥檚 Department of Finance said it was still far too early to say what the bank failure and its attendant economic impact might have on the state鈥檚 .
Silicon Valley Bank鈥檚 sudden demise will be studied and debated for weeks and months to come. But for all the bank鈥檚 association with innovation and newfangled tech, the factors behind its collapse seemed to be, in the words of Bloomberg columnist Matt Levine, 鈥溾�� as far as bank failures go.
Long story short: Depositors began withdrawing money just as the bank鈥檚 investments began to tank.
On the depositor side, much of the bank鈥檚 money came from start-ups and other Silicon Valley savers. Driven by higher borrowing rates and the end of a in demand for remote everything, Silicon Valley has seen and depositors with the bank have been drawing down their savings. Higher interest rates also led many of those savers to seek out higher returns for their cash elsewhere.
This drawdown required the bank to cash out some of its investments. Unfortunately for the bank, many of those were in long-term Treasuries and mortgage-backed securities. As the Federal Reserve has cranked up interest rates to quell inflation, the value of those assets plummeted. Thus, on Wednesday, the bank announced losses of $1.8 billion.
Spooked by that news, many depositors tried to take all their money out at once. The next day, $42 billion disappeared from the bank鈥檚 digital vaults, , a mass withdrawal urged on by some tech sector giants, including the co-founded by conservative billionaire Peter Thiel.
The result: an old-fashioned bank run the likes of which .
A casualty of anti-inflation policy
Some commentators have been less charitable to the erstwhile bank, arguing the bank鈥檚 management did little to calm skittish investors of epic proportions.
Because the bank鈥檚 financial troubles can be traced back to higher interest rates, Silicon Valley Bank might be called the
The big question is whether it will be the last. After the federal takeover, , worried that they too might be facing a borrowing rate squeeze.
Those who held cash with Silicon Valley Bank were protected, but only to a point. The Federal Deposit Insurance Corporation backs deposits up to $250,000. That wasn鈥檛 likely to help many of the bank鈥檚 clientele, disproportionately made up of start-ups with millions socked way.
It was that fearsome prospect of tech companies across northern California suddenly finding themselves cashless and unable to make payroll that ultimately led the federal government to intervene.
One venture capitalist warned of a 鈥�.鈥� Reporting over the weekend highlighted the potential collateral damage that could befall everything from to the to . Bay Area politicians called for .
On on Sunday morning, Silicon Valley Rep. Ro Khanna urged the federal government to ensure that 鈥渁ll depositors will be protected and have full access to their accounts.鈥�
鈥淚f theoretically the federal government did nothing, we would have risk of contagion and the spread of it would just be very bad,鈥� said state Sen. Scott Wiener, a San Francisco Democrat, prior to federal regulators鈥� announcement.
That announcement came Sunday afternoon. 鈥淒epositors will have access to all of their money starting Monday, March 13,鈥� FDIC Chairman Martin J. Gruenberg said in a with Treasury Secretary Janet Yellen and Federal Reserve Board Chair Jerome H. Powell.
That鈥檚 an unusual resolution for a bank failure, said Joao Granja, an accounting professor who specializes in banking regulation at the University of Chicago. Typically, federal regulators will try to find another private bank to take over the failed one, guaranteeing all of its deposits.
The fact that no buyer was immediately forthcoming reflects both 鈥渉ow suddenly and quickly the situation unfolded,鈥� said Granja, but also that Silicon Valley Bank is 鈥渓arge and specialized鈥� in the tech sector.
What Silicon Valley means to California鈥檚 budget
The state as a whole need not panic just yet, said Emily Mandel, an economist who monitors state finances for Moody鈥檚 Analytics. The bank鈥檚 failure is 鈥渕ore a symptom of ongoing weakness in the tech industry rather than a sea change,鈥� she said.
Still, California lawmakers are . Roughly half of the state鈥檚 personal income tax revenue , most of whom get paid in stocks and other financial instruments. That鈥檚 why the possibility of additional tech sector hiccups and financial market gyrations aren鈥檛 likely to be welcome news in the Capitol.
鈥淚 don鈥檛 expect this will be a repeat of 鈥�08, I expect this to be more of an isolated event.鈥�EMILY MANDEL, ECONOMIST AT MOODY鈥橲 ANALYTICS
An analysis by the nonpartisan Legislative Analyst鈥檚 Office last year noted that the total amount of income tax withheld from California paychecks was coming in far below expectations. The culprit, : A steep decline in salary bonuses and a dearth of new initial public offerings 鈥� stock exchange coming out parties that, just a few years ago, were across the Bay Area.
But to the extent that the Silicon Valley Bank saga reflects underlying shakiness in tech, those concerns are likely already reflected in the state鈥檚 , said Mandel.
鈥淵es, weakness in tech is going to result in some weakness in revenues but this doesn鈥檛 change the contours of what we would expect,鈥� she said. 鈥淚 don鈥檛 expect this will be a repeat of 鈥�08, I expect this to be more of an isolated event.鈥�
The state鈥檚 public sector pensioners also aren鈥檛 likely to take a major hit in the short-term. Of the roughly $444 billion in investments currently managed by the California Public Employees鈥� Retirement System, (roughly two-percent of one-percent of the total) were bonds to Silicon Valley Bank, according to a summary of the fund鈥檚 investments through June of 2022. More recent figures are not yet available.
Broader rumblings in the tech world would reverberate through the pension fund鈥檚 portfolio, but the exposure is still relatively limited. Taking Apple, Alphabet, Amazon, Meta and Microsoft together, CalPERS holds $1.7 billion in corporate bonds.
California Department of Finance spokesperson H.D. Palmer stressed that the failure of a single bank, though painful for those directly involved, won鈥檛 on its own shake a state as large as California.
鈥淚s this endemic? Is this a problem that 10 other banks are facing?鈥� he said. 鈥淲hat we know so far comes nowhere near to bearing that type of projection out.鈥�
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