How Does The Failure of Silicon Valley Bank Affect Stakeholders
The fall of the Silicon Valley Bank happened very suddenly. The bank had gone from a healthy functioning bank to near bankruptcy within 48 hours! As a result, the credibility of the entire American banking system has been brought into question. This is because commercial banks are not like regular organizations. In most cases, they cannot be allowed to go bankrupt. This is because almost every commercial bank has several stakeholders and hence their bankruptcy has an important effect on the entire ecosystem.
In this article, we will have a closer look at how the Silicon Valley Bank collapse affects the various stakeholders within the banking ecosystem.
- Depositors: Depositors are the primary source of funds for any commercial bank. It is for this reason that whenever a bank run takes place, the depositors are the ones who are most likely to be affected.
The Federal Deposit Insurance Commission (FDIC) insures deposits up to $250000 in financial institutions. Hence, when the Silicon Valley Bank first collapsed, the communication sent was that the depositors will have access to $250,000 in their accounts. The rest of the money was going to be returned over a longer period of time. However, as soon as this news was released, there was panic spread across the entire startup ecosystem. This is because most of Silicon Valley Banks customers were startups.
Now, most of these startups had more than $250000 in their respective bank accounts. Hence, they were very worried since a large chunk of their deposits were uninsured. The management at many of these startup companies had made comments that they will not be able to make payroll if their funds are not released.
As a result, the Fed came up with a statement and mentioned that the depositors will be able to access all their money whether insured or uninsured. Hence, the FDIC and the Fed have ensured that the interests of depositors are not compromised in any manner whatsoever.
- Borrowers: Once the news of the Silicon Valley Bank came in, borrowers of the bank also started facing a lot of confusion. This is because they did not know whether they should continue making their payments to a legal entity that might not even exist after a few days! The Fed issued a statement to bring some clarity in this regard. They asked the borrowers to continue making payments to the same entity i.e. Silicon Valley Bank for the time being.
If the bank is sold out at a later date, then the same will be communicated to the borrowers when required. Also, in the case of loans such as lines of credit, the bridge bank which has been created in place of Silicon Valley Bank will continue extending credit in order to ensure minimal disruption of services to the borrowers.
- Employees: In case of the failure of any bank, it is common for the bank employees to be retained only for a short period of time. This is done in order to run the bank till a new buyer is found. Once this new buyer is found, the employees are also responsible for conducting the transition of their operations to this buyer. After the transition is complete, the new buyer may or may not choose to retain the employees. They are not bound by any contract to continue employing the same personnel.
In the case of Silicon Valley Bank, the senior management i.e. chief executive officer, chief financial officer, etc. have already been fired. The mid and junior-level staff have been retained by FDIC for a couple of months and they are being paid 150% salary. Once again, Fed has gone out of its way to ensure that the employees are getting a fair deal.
- Shareholders: The shareholders are the only party that stands to lose as a result of the collapse of the Silicon Valley Bank. It is right since based on capitalistic principles, they are the ones who take all the profit when the going is good.
Hence, by definition, they must also absorb all the losses when mistakes are made. Also, the shareholders appoint the Board of Directors and the senior management. As a result, they should be considered to be responsible for their actions and the losses which might accrue because of the same.
The Silicon Valley Bank had a total net worth of $16 billion. It is estimated that $15 billion has already been lost during the crisis. Hence, the shareholders stand to lose almost all of their investment and the Fed is unlikely to intervene to change this.
- FDIC: The Fed has decided that the entire deposits of Silicon Valley Bank will be paid out. Now, legally the liability of the FDIC is to only pay up to $250000 per account. Hence, in order to pay the additional amount, the FDIC will have to arrange for more money.
The Fed has decided that FDIC will first pay all the losses. At a later stage, the amount paid for uninsured losses will be calculated. After that, a fund will be created wherein all the other banks will have to chip in to make good the loss faced by FDIC. This is a cost to all the banks.
However, the cost of paying a small contribution might be much smaller than the cost of losing customers and deposits since the confidence in the banking system has been broken. The Fed has ensured that the banking system will be self-sufficient when it comes to bearing losses. None of the losses will be transferred to the taxpayers or the general public.
The fact of the matter is that the Fed and the FDIC have ensured that all the stakeholders are treated fairly. However, this is just a plan as of now. It needs to be seen whether it can be implemented with the same spirit with which it was planned.
|❮❮ Previous||Next ❯❯|
Authorship/Referencing - About the Author(s)
The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
- History of Modern Banking
- Central Banking in the United States
- Functions of a Central Bank
- Regulatory Role Performed By the Central Bank
- How Reserve Requirements Work ?
- Interbank Lending Markets and Repurchase Agreements
- Types of Products in Commercial Banking
- How Credit Rating Works ?
- Technology and Banking Delivery Channels
- Intermediaries to a Credit Card Transaction
- Fee Based Banking Services
- What Are Smart Cards and How are They Better than Credit Cards ?
- Risks Faced By Banks
- The Kingfisher Airlines Outrage
- What is Islamic Banking ?
- Retail Banking : Demand Deposit Products
- Retail Banking: Time Deposit Products
- Multiplier Effect: How Fractional Reserve Banking Creates Money ?
- Capital Adequacy Ratio
- The Three Basel Accords
- Shadow Banking - Meaning, Functions, Advantages & Disadvantages
- Internet Only Banks
- The ABC of Peer To Peer Credit
- Should Too Big To Fail Banks be Broken to Pieces ?
- Rigging the LIBOR
- Living in a Cashless Society
- Cashless Economy: Pros and Cons
- The Sinister Motive Behind Cashless Society
- The War on Cash
- Asset Reconstruction Companies
- Lockbox Service Provided by Banks
- Treasury Operations of Banks
- Hire Purchase Agreements
- United States and the Curse of Predatory Lending
- Chinas Predatory Lending
- Fin Tech: The Future of Banking
- Peer To Peer Lending
- How Technology has been a Game Changer for the Banking and Financial Services Sectors
- The Mega Scam in the Indian Banking System
- Privatization of Indias Public Sector Banks
- Case Study of the Indian Banking and Financial Services Industry using Strategic Tools
- How dire is India's bad debts problem and what you need to know about it
- Collusion between Private Banks and Central Banks
- Interest Rates and Their Effect on Small Businesses
- Deutsche Bank: The Fall of a Giant
- The Problem with Farm Loan Waivers
- Whats Wrong with European Banks?
- Bank Recapitalization in India
- Will The Fiat Money System Collapse?
- The Rise of Dynamic Discounting
- Demystifying the Mysterious, Glamorous, and Demanding World of Investment Banking
- Indian Banking Sector: Inter-Creditor Pacts
- Why Reserve Bank of India Spooked Investors?
- Why Should Central Banks Be Independent?
- The Downfall of Chanda Kocchar - Indias Rockstar Woman CEO
- BB&T and Sun Trust Bank Merger
- The Deutsche Bank Commerzbank Merger
- The Inherent Conflict of Interest in Interest Rates Determination
- The Problem with Postal Banking
- The Wells Fargo Auto Insurance Scandal
- What is FinTech and How it Enables Banking and Financial Firms to Leverage Technology
- The Silicon Valley Bank Collapse: Why Is It Important?
- Impact of the Fall of Silicon Valley Bank
- Rising Interest Rates: The Perfect Storm for The Silicon Valley Bank
- Poor Risk Management at the Silicon Valley Bank
- How Does The Failure of Silicon Valley Bank Affect Stakeholders
- The Role of Bridge Banking in The Silicon Valley Bank Crisis