Martha M. Leon Fernandez
Associate Editor
Loyola University Chicago School of Law, JD 2024

The collapse of Silicon Valley Bank (SVB), the 16th-largest bank in the United States, in early March of this year is considered the biggest bank failure since the fall of Washington Mutual during the 2008 global financial crisis. After 40 years of success, the bank collapsed swiftly and unexpectedly. The collapse has ricocheted through the industry, provoking bank closures, rattling the global markets, and threatening the livelihood of startups. The Federal government has not only intervened and taken over the bank, but prosecutors and regulators from the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have initiated preliminary investigations. Inevitably the collapse will cause regulators to revise the current banking rules and pursue stricter regulation in order to prevent the demise of other banks and a financial crisis.

How did SVB collapse?

SBV was founded in 1983 as a small California bank serving tech-oriented startups. The bank’s reputation led SVB to become the hub for venture capitalists and startups. This led to an influx of deposits and in 2018, SVB held $49 billion, but by the end of 2021, SVB held $189.2 billion. By 2021 its stock price also tripled from what it had been in 2018. Despite its all-time success, the bank was struggling to make a profit from the growth in deposits. In an attempt to resolve this issue, SVB began to build up its investment banking business, and in order to tap into clients on the opposite coast, they purchased a Boston bank. It is typical and safe for banks to invest customers’ money in a variety of short and long-term government-backed bonds. However, SVB made the dangerous choice to invest tens of billions of dollars in long-term Treasury and mortgage bonds issued by the government since they paid more when interest rates were low.

Once interest rates began to climb, the bond prices fell, leading SVB to bear an enormous loss as the bonds they purchased were worth $17 billion less than what they initially paid for them. This was not a big problem until the bank’s client deposits shrank  as start-up funding slowed and clients began to withdraw increasingly large sums from their accounts. In order to be able to keep up with the clients’ withdrawals, the bank sold off $21 billion in securities at a loss of $1.8 billion dollars. On March 8, 2023, SVB announced in its regulatory filing its $1.8 billion loss and its intention to raise $2.25 billion by selling a mix of common and preferred stock. This caused mayhem as the following morning, SVB’s stock crashed, signaling to depositors that there might be major issues with the bank. Panic spread, and by the close of business on March 9, 2023, clients attempted to withdraw $42 billion.

What was the federal response?

Before the bank could open Friday morning, it was seized by The Federal Deposit Insurance Corporation (FDIC) regulators. Regulators assured customers they would have access to the entirety of their money in a matter of days. Moreover, the government rolled out a new program for banks, the Bank Term Funding Program (BTFP). This program is meant to prevent a similar failure as the one that SVB experienced and will allow banks to pledge their bonds (treasury and mortgage-backed bonds) to receive advances without having to sell their bonds at a loss. Treasury Secretary, Janet Yellen, testified before Senate that the banking system was healthy despite the collapse.

However, the President has asked Congress to pass legislation that would permit financial regulators to impose fines and other penalties against executives of failed banks. The measures proposed would give regulators the power, through the claw back provision, to seek the return of compensation earned from executives of both small and large banks. Additionally, he proposed that Congress expand the FDIC power to bar executives of failed banks more easily from working in positions of authority within the financial industry.

Lawmakers are also proposing the reinstatement of legislation that would increase the regulatory scrutiny for many regional banks and regular stress testing, which was repealed in 2018. The fallout has led Democrats to blame the collapse on the deregulation of banks, and Republicans blame the Biden Administration for their failure to supervise the Fed.

What are the DOJ and SEC investigating?

Elizabeth Warren and Richard Blumenthal, two Senate Democrats, urged the DOJ and SEC to investigate whether SVB’s senior executives had violated laws or failed to carry out their regulatory duties.

It is customary for the DOJ and SEC to investigate after a negative market event. In this situation, both agencies are undertaking investigations pertaining to the SVB collapse. They are currently at their preliminary stage, and it is uncertain whether the probe will lead to any formal charges or civil claims. The SEC is likely going to examine the sudden bank collapses and whether the firms accurately disclosed financial risk and business uncertainties to their shareholders. In contrast, the DOJ is undertaking a criminal investigation to determine if there is a connection between the sale of SVB stocks by top executives weeks before the collapse of the bank. Likely trying to determine whether the sale of the stocks was motivated by nonpublic information.

Although compliance is expensive for smaller banks, it is still just as necessary as it is for bigger banks. The entire purpose of compliance is to identify issues, monitor, and provide solutions that can prevent major losses, instability, and distress.