Silicon Valley Bank: Could this happen in Idaho?

Could the collapse of  Silicon Valley Bank happen here?

SVB, the 16th largest bank in the United States, collapsed on March 10, creating the second largest bank failure in US history. The bank’s failure was a result of several factors including its investments losing value and its depositors withdrawing large amounts of money. 

According to Trent Wright, president and CEO of the Idaho Bankers Association, there was an unusual combination of red flags involved in the collapse, such as very rapid growth, extreme risks, and a general lack of an internal risk management framework.

“SVB tripled in size in two years. Very few other banks of their size experienced similar levels of growth,” Wright said. “The bank did not appropriately manage its risk as all banks are expected to do, nor did it diversify its deposit concentration or take steps to limit its exposure to the rapidly rising rate environment.”

The steep rise in interest rates depressed the value of SVB’s treasuries and other safe assets, in turn preventing the bank from raising enough cash to meet deposit outflows, Wright added. 

“Typically, these risks are managed internally by banks, which also must comply with a strong supervisory and regulatory framework,” he said. “Outliers such as SVB typically trigger enhanced supervisory attention.”

The Federal Reserve and FDIC reacted quickly to protect depositors and others that are affected “downstream” when banks fail. “This means everyday people who expect a paycheck and work for a business that does business with an organization that may bank with one of the impacted banks,” Patti Perkins, Director at the Idaho Department of Finance, said. “The fix doesn’t just impact the bank and immediate customers, but helps many others that are connected.”

SVB was unprepared for the rising interest rates which impacted the value of their bond portfolio, dropping the value significantly.

“They were forced to sell a significant portion of those bonds at a loss to meet liquidity demands,” she said. “As news of the losses spread quickly, more and more customers withdrew their deposits causing the bank to fail quickly as it was unable to meet withdrawal requests.”

Perkins said the unusual factors involved in SVB’s collapse would not be present in Idaho state chartered banks. 

“These factors include their concentration in the tech industry and focus on high-net worth individuals and entities with operating accounts with high balances, in addition to the rising interest rate environment,” Perkins said. “They had an unusually high percentage of deposits in excess of the FDIC insurance limit.”

Idaho banks are “strong” and are not likely to experience the same problems of SVB, Perkins added: “The Department of Finance monitors liquidity levels in all their financial institutions through regular communication and examinations.”