Alex Mather, co-founder of The Athletic, a sports media company, looked down at his phone with unease on Friday afternoon during a sports journalism panel inside the Hyatt Regency in San Francisco.
The former tech mogul just received a notification that Silicon Valley Bank had collapsed and that the Federal Deposit Insurance Corporation (FDIC) had taken over the bank’s operations.
The one problem: The Athletic’s financial holdings were at Silicon Valley Bank.
In the middle of Mather answering questions from students, he received a phone call.
“I gotta take this. Payroll is on Monday,” Mather said.
Silicon Valley Bank collapsed on Friday, forcing the FDIC to take control of the bank and develop a financial plan to address the largest bank failure since the 2008 financial crisis, according to a Sunday New York Times article.
The FDIC is an independent agency protecting depositors of an insured bank against the loss of their deposits in case of bank failure, according to its website.
Silicon Valley Bank’s failure is connected to high interest rates – applied by the U.S. government to face inflation – and a significant withdrawal from part of its customers, according to a Monday New York Times article.
Justin Rietz, economics assistant professor at San Jose State, said the bank is not the only financial institution facing high interest rates.
“Silicon Valley Bank wasn't as prepared as they should have been for this type of situation,” Rietz said.
He said the bank did not have enough cash deposits to face the high requests from its customers.
“Silicon Valley Bank had a lot of their assets in bonds,” Rietz said. “And government bonds, as interest rates are going up, the value of those bonds is dropping, but they still have the same amount of deposits for customers.”
He said, as customers wanted to cash out, the bank had to sell off its bonds to catch up with the demands, but those bonds weren't worth as much as they had planned on, causing it to fail to raise enough money.
SJSU finance assistant professor Matthew Faulkner said since 2008, interest rates have been very low.
“So that means the idea of just money flowing through an economy and borrowing money is really, really cheap to get your hands on,” Faulkner said.
He said interest rates have significantly increased over the last decade.
“The reason they raised those interest rates was because inflation was getting out of control,” Faulkner said. “So that's one way to combat that, which means stop spending so much money.”
The Silicon Valley Bank collapse raised concerns among bank customers across the country, according to a Friday New York Times article.
President Joe Biden said the American banking system is safe during a press conference on Monday.
“Americans can have confidence that the banking system is safe,” Biden said. “Your deposits will be there when you need them.”
Rietz said he has no doubt the government is trying to instill confidence in the banking system to avoid the panic which could possibly lead to massive cash withdrawals from the banking system.
“I bet Janet Yellen, the treasury secretary who used to be the head of the Federal Reserve, told them over the weekend, ‘You need to go out and say this,’ ” Rietz said.
San Jose Mayor Matt Mahan said he was disappointed that Yellen did not support bailing out Silicon Valley Bank. He said businesses could be in danger of shutting down if the federal government does not step in.
“The secretary’s approach is weak, half-hearted and wrong,” Mahan said. “We don’t have time to wait for a white knight to swoop in and acquire the bank. Half of Silicon Valley’s startups are at risk of missing payroll in the days ahead if the FDIC doesn’t guarantee and give immediate access to their deposits.”
Biden also said the government regulator in charge, the FDIC, took control of Silicon Valley Bank’s assets on Friday.
However, Yellen said the government will not bail out the Silicon Valley Bank, as it did for other banks in 2008, according to a Sunday NPR article.
The FDIC provides a standard deposit insurance up to $250,000 per depositor, per insured bank, for each account ownership category, according to its website.
“No losses will be borne by the taxpayers,” Biden said. “Instead, the money will come from the fees that banks pay into the Deposit Insurance Fund.”
Faulkner said the federal government plan is not bailing out Silicon Valley Bank.
He said, in case the customer's deposits would exceed the standard insurance of $250,000, the government will pay them without using taxpayers’ money.
“There's no taxpayer money, the government's just fronting it, it's almost like the government is going to hand it to all the depositors, and then collect it all back from the sale of the bank and any other loss from all the other banks,” Faulkner said.
The Silicon Valley Bank, which is connected to numerous startups that rely on the bank to pay their employees, generated consequences in other sectors of the Bay Area because of its failure.
SJSU linguistic junior Brandon Rodriguez is the manager of Thinker Toys, a toys store located in Morgan Hill.
Rodriguez said he expects to see “a lot less customers coming into the store.”
“You know, our customers, a lot of them work in tech,” he said. “So you know, if their companies aren't able to pay them, then, how is it that they're able to stay in the area and shop locally and support us as a business?”
Faulkner said although the crash will hurt companies who put money in the Silicon Valley Bank in the short-term, he doesn’t believe innovation in Silicon Valley will come to a halt.
“I don't think innovation is going anywhere from the Bay Area,” Faulkner said. “I think this is going to be a bigger look at the banking industry than it is about the startup industry.”
