Silicon Valley BankThe nation’s 16th largest bank failed because its managers made a textbook mistake, according to former Treasury Secretary Larry Summers.
Summers, a Harvard University professor who served in both the Clinton and Obama administrations, said Monday that the bank “committed one of the most Elementary Errors in BankingBorrowing money in the short term and investing it in the long term.
SVB collapsed on Friday after depositors ran into the bank, which did not have the cash to cover their withdrawals. It was the second largest bank failure in US history and the largest since the collapse of Washington Mutual in 2008.
What happened was quite simple: When interest rates were at historic lows, SVB invested depositors’ funds in long-term Treasury bonds. But as the Federal Reserve raised interest rates to combat inflation, the value of those bonds plummeted, taking the SVB along with it.
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“When interest rates rise, the assets lose their value and put the institution in a problematic position,” Summers explained on Twitter.
On Wednesday, SVB posted a post-tax loss of $1.8 billion as it seeks to address its liquidity crisis by selling equity, The move backfired – in just 24 hours, SVB lost more than $160 billion in value and scared off depositors, who rushed to withdraw their money before the situation worsened.
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Regulators stepped in on Friday, when federal deposit insurance corporation took over the bank. The SVB had $209 billion in assets and $175.4 billion in deposits at the end of 2022, the FDIC said in a statement. This guarantees that the insured deposit, up to the statutory limit of $250,000, will be made available by Monday.
The FDIC created a new entity called Silicon Valley Bank NA, and moved all SVB deposits where depositors can access their money.
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East fannie mae Reuters reported that head Tim Mayopoulos was appointed CEO of the new Bridge Bank.
“I look forward to getting to know Silicon Valley Bank’s clients… I also come to this role with experience in these types of situations,” Myopoulos wrote in a letter to clients. “I was part of the new leadership team that joined Fannie Mae in the wake of the financial crisis in 2008-09, and I served as CEO of Fannie Mae from 2012-18.”
In an interview on CNN, Summers called for increased supervision and regulation of the banking industry.
“It does not appear on the present facts that a very good job was done of regulating and supervising Silicon Valley Bank,” he said.