What Silicon Valley Bank’s Collapse Says About the Easy Money Era Ending
Members of the media line up outside of a Silicon Valley Bank office on March 13, 2023, in Santa Clara, California. Days after Silicon Valley Bank collapsed, customers lined up to try and retrieve their funds from the failed bank. (Justin Sullivan/Getty Images)
On Sunday, the U.S. government announced sweeping actions to contain the fallout from the collapse of Silicon Valley Bank, which suffered a bank run after struggling to adapt to the Federal Reserve’s record pace of interest rate hikes and a slowing tech sector.
The Federal Reserve, Department of the Treasury and Federal Deposit Insurance Corporation said they would guarantee the deposits of customers at Silicon Valley Bank — which shut down on Friday in the largest bank failure since the Great Recession — as well as New York-based Signature Bank, which regulators shut down on Sunday after a bank run prompted by the panic at SVB. The agencies’ move is intended to “strengthen public confidence in our banking system.”
In an effort to prevent further bank runs, President Joe Biden reassured the American public that the banking system is safe, and said in remarks on Monday, “Your deposits will be there when you need them.” Biden said the relief would be funded not by taxpayers but by funds that banks pay into the FDIC system. He added that investors at the two banks would not be protected from losses and that bank management staff would be removed now that the FDIC is running the bank.
Both banks had a host of factors contributing to customers losing confidence and withdrawing money. But one significant force that impacted SVB was the pressure created by the Federal Reserve’s record pace of interest rate hikes over the last year in an effort to curb inflation — a swift departure from the economy of the last 14 years when borrowing money was far cheaper. Premiering Tues, March 14, FRONTLINE’s new documentary Age of Easy Money investigates how the Federal Reserve’s “easy money” policies unfolded and examines the risks presented to the U.S. economy as the Fed rolls back those policies.
In the documentary excerpt below, experts pointed to a famous Warren Buffett quote to explain how interest rate hikes could expose underperforming companies.
The quote from Buffett goes: “Only when the tide goes out do you learn who has been swimming naked,” meaning that companies that thrived on cheap loans might no longer be able to survive now that the economy has shifted and borrowing is more expensive.
As the film traces the Fed’s “easy money” experiment from the Great Recession to the current moment as the Fed battles inflation, it explores a key question: What disruptions can Americans expect — in their jobs, their savings and the economy as a whole — now that the age of easy money is coming to an end?
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In the case of Silicon Valley Bank, years of low interest rates during the age of easy money fueled venture capital investment and were a boon for tech companies. That brought good business to banks that served those companies, like SVB.
But surging inflation prompted the Fed to start raising interest rates in 2022. With tech companies relying heavily on loans, those rate hikes hurt them more than other companies, and investment in tech slowed. Since Silicon Valley Bank counted on tech startups as its primary customers, a slowdown in tech funding put the bank in a harder financial position.
What happened at Silicon Valley Bank exposed a “potential fragility in the system related to monetary policy,” according to Sheila Bair, chair of the FDIC from 2006 to 2011. “There’s only so much the system can absorb in terms of undoing all the damage that was caused by this 14 years of easy money,” Bair told FRONTLINE in an interview conducted in the aftermath of the bank collapse.
Adding to its vulnerability, Silicon Valley Bank was heavily invested in government bonds that performed poorly as interest rates went up. The bank announced on March 8 that it lost $1.8 billion on a sale of those bonds. That set off a panic among customers and investors, led to massive withdrawals, and ultimately, the bank’s collapse. Investors and business owners became skeptical of any bank threatened by higher interest rates and a slowing tech sector, leading to the bank run at Signature Bank in New York and concerns about other midsize banks.
The biggest question facing regulators and policymakers is whether the collapse of the two banks has been contained or if it presents broader risks to the economy. One worrying factor is the scale: SVB’s failure marks the largest bank collapse since the Great Recession. But, SVB was just the 16th largest bank by total assets, and it was fairly focused on the tech sector compared to the more broadly-invested banks that failed during the Great Recession.
President Biden and Democratic lawmakers on Monday pointed to the 2018 loosening of some of the financial regulations put in place by the Dodd-Frank Act in the wake of the 2008 financial crisis as one of the factors that contributed to SVB’s collapse.
The failure of the banks illuminates once again the tug-and-pull of the current economy: the Fed’s main tool for fighting inflation is to slow the economy by raising interest rates, but doing that too quickly may cause drastic disruption to an economic system so used to easy money.
In a statement on Sunday, the Federal Reserve said, “The capital and liquidity positions of the U.S. banking system are strong and the U.S. financial system is resilient.” It added that it was “closely monitoring conditions across the financial system and is prepared to use its full range of tools to support households and businesses, and will take additional steps as appropriate.”
Bair said perhaps the collapse of SVB would “serve as a wake up call to the Fed” that it needed to stop and assess before tightening interest rates further. “I think the worst situation we get into is that really aggressive rate hikes cause a financial crisis, and they take rates back to zero again to bail out the financial sector.”
For more, watch Age of Easy Money, premiering at pbs.org/frontline and in the PBS Video App Tuesday, March 14 at 7/6c and on PBS stations (check local listings) and FRONTLINE’s YouTube channel at 9/8c.
Producers James Jacoby and Anya Bourg contributed to this report.
