Silicon Valley Bank Crisis Triggers Higher Savings Rates Across US Banks

Banks Raise Interest Rates to Shore up Deposits After SVB’s Collapse

The sudden collapse of Silicon Valley Bank (SVB) last year left many banks in the United States reconsidering their interest rates to shore up deposits from skittish customers. SVB, which was a bank of choice for venture capitalists and innovators, had lent funds to businesses lacking revenue streams. However, it collapsed due to its management’s choice of placing funds into mortgage-backed securities and 10-year treasury bonds, which it could not cash out despite warnings.

Following the crisis, banks in the country have been increasing their deposit rates as fears of a bank run grow, with customers likely to move to other banks if they feel their savings are at risk. Some banks have increased their rates mildly, but online banks have been more aggressive with the average rate at 3.52% up from 0.49% a year ago. Online banks are increasing deposit rates because it is easier for their customers to move money.

Ally Bank recently raised the rate of its 11-month no-penalty CD from 4% to 4.75% to reduce outflows of deposits from skittish customers. Meanwhile, Western Alliance’s rate climbed from 4.45% to 4.75%, and MainStreet Bank of Fairfax, Virginia introduced a 15-month no-penalty CD with a rate of 5%. The average online savings rate rose by 22 basis points to 3.74% from March 1st to March 24th.

With some banks trying to snare a share of the deposits ricocheting through the banking system, banks want to shore up their deposits and reduce the odds of being hurt by a bank run brought on by fears about maintaining deposit levels.

Venture Capitalists’ Refusal to Acknowledge Their Role in SVB’s Failure

The hypocrisy of venture capitalists and their loud-mouth behavior is disliked by the public, and their refusal to acknowledge their role in Silicon Valley Bank’s failure has raised eyebrows. The bank, which appeared to be on solid footing until its collapse last year, had reached out to the venture capitalist community for help but almost no one came forward to purchase shares. Instead, they opted to withdraw their deposits.

Venture capitalists and hedge fund managers had the opportunity to save the bank with private money and the efficiency of deregulated capital markets, but they chose to run away and later demanded that government rules be changed for them.

SVB was a bank of choice for venture capitalists and worked with innovators, providing risky loans for businesses lacking revenue streams. However, due to its management’s poor investment choices, the bank went into decline. Placing funds into mortgage-backed securities and 10-year treasury bonds sealed the bank’s fate as it could not cash out despite warnings.

Cost and Resolution of SVB Bank Failure

The failure of Silicon Valley Bank has not only affected the banking industry but has also had a significant financial impact. The FDIC estimates that the SVB resolution will cost the deposit insurance fund $20 billion, while its receivership has already lost $16.5 billion in discounted loan values needed to consummate the First Citizens deal.

Regulatory agencies declared SVB a “systemic risk” to the financial system imposing a blanket deposit insurance guarantee costing the FDIC fund at least $20 billion. This makes it the most costly bank failure in FDIC insurance fund history. The failure could have been resolved with minimal cost if treated as a routine bank failure.

Treating SVB as a routine bank failure would have resolved the issue without any cost to the FDIC deposit insurance fund; however, the systemic risk exception deposit blanket guarantee allowed $62.5 billion in uninsured deposits to run, transferring more than $20 billion in losses to the deposit insurance fund and ultimately to taxpayers.

The sale of $90 billion in held-to-maturity securities may result in additional losses. However, the FDIC retains some upside through equity appreciation certificates but must partially share future loan losses.

In conclusion, Silicon Valley Bank’s crisis has triggered higher savings account and CD rates across many US banks as they try to prevent customers from shifting to other banks. As the banking industry tries to recover, venture capitalists must do better and acknowledge their role in the bank’s failure, while regulators should treat systemic risks as a routine bank failure to reduce the financial burden on taxpayers.

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