On March 10, 2023, the United States suffered the first major bank failure since the 2008 economic collapse. It was the nation’s 16th largest bank, with over $200 billion in assets. Specifically, the California Department of Financial Protection and Innovation (DFPI) closed Silicon Valley Bank (SVB). Various warning signs earlier that week, including a downgrade by Moody’s of SVB’s long-term local currency bank deposit outlook, a sale of SVB’s bond portfolio at a loss of 1.8 billion, and subsequent stock drops, culminated in a run by SVB’s depositors and the bank’s ultimate failure.

This closure caused panic nationally among many banking customers with large deposits. The FDIC insures deposits up to $250,000 per depositor, leaving unprotected many businesses which carry large balances. Depositors who held uninsured amounts started withdrawing money from their accounts across the country, affecting the stock market and various mid-size banks. On Sunday, March 12, regulators closed Signature Bank in New York, another niche mid-sized bank. It was a well-capitalized bank with forty branches, and had ties to President Trump, the real estate market, and a number of law firms.

Federal Banking Aid

To stabilize the banking sector, the federal government invoked the systemic risk exception authority. This authority gave it several tools to help the banking system, including making the depositors whole and providing loans to the banking sector through a Bank Term Funding Program (BTFP). See March 12, 2023, Joint Statement by Treasury, Federal Reserve, and FDIC. (“Joint Statement”); Press Release, March 12, 2023, Federal Reserve Board announces it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.”

The agencies assured the at-risk depositors that they “will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer. We are also announcing a similar systemic risk exception for Signature Bank, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.” See Joint Statement.

In order to ensure continued access to depositors’ funds, the FDIC created two new “Bridge Banks.” See Press Release, Monday March 13, 2023, FDIC Acts to Protect All Depositors of the former Silicon Valley Bank, Santa Clara, CaliforniaPress Release, Sunday March 12, 2023, FDIC Establishes Signature Bridge Bank, N.A., as Successor to Signature Bank, New York, NY. SVB and Signature Bank depositors should be able to access their money as usual.

Further Government Action Ahead

Treasury Secretary Janet Yellen testified that this occurrence with SVB/Signature Bank should not be taken as a precedent for bank failures going forward. Uninsured deposits will not become “insured” as a rule. She explained that the government’s refunds of uninsured deposits will happen only when a bank failure poses systemic risk to the financial system.

Finally, the SVB and Signature Bank failures brought renewed attention to the fact that midsize banks are no longer subject to the regulations that the Dodd-Frank Act implemented. Specifically, in 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) revised the minimum threshold for stress testing and other regulatory requirements to $250 billion, ensuring only very large institutions were subject to the regulations. See e.g., Office of the Comptroller Currency, Dodd-Frank Act Stress Test. Democrats in the Senate are drafting legislation in the Senate to address this gap. See The Secure Viable Banking Act. However, with a divided legislature, it is difficult to see any action happening soon.