Silicon Valley Bank Collapse and the Ramifications for the Housing Market and POC

Written By Rudolph Metayer

On March 10, 2023, regulators shut down Silicon Valley Bank (SVB), making it the second-largest bank failure in U.S. history [1]. SVB — headquartered in Santa Clara, California, and with operations in Europe and Asia — was a leading provider of financial services to the technology and innovation startup industries. SVB worked with many well-known companies and investors, including Apple, Google, and Amazon — as well as venture capital firms like Andreessen Horowitz and Sequoia Capital.

Before the collapse, it was the 16th largest bank in the U.S., with over $200 billion in assets [2]. SVB’s parent company sold $21 billion worth of securities in early March at a loss of around $1.8 billion to raise $2.25 billion of equity capital, raising concerns among several customers and causing them to withdraw their deposits from SVB. The situation was exacerbated by over 90 percent of SVB’s deposits being uninsured, reflecting its corporate customer base [3].

FDIC Takeover

The Federal Deposit Insurance Corporation (FDIC) — an independent branch of the government created during the Great Depression to restore public confidence in banks — took over the bank to protect its depositors. In addition to insuring deposits, the agency "examines and supervises financial institutions for safety, soundness, and consumer protection; makes large and complex financial institutions resolvable; and manages receiverships.”

FDIC's standard insurance amount is $250,000 per depositor, and most SVB depositor funds exceeded the $250,000 cap. The FDIC, Treasury Department, and Federal Reserve assured all depositors could access their funds because the SVB collapse threatened the financial system [4].

The Next Great Depression?

Many Americans fear the SVB collapse will trigger an economic collapse similar to the 2008 housing crisis, which threw the economy into its most severe downturn since the Great Depression. In the early 2000s, banks approved subprime mortgages for unqualified borrowers who could not refinance or repay the loans. The SVB crisis began with a single regional bank that disproportionately served tech companies. Hundreds of banks failed in the 2008 crisis, but only two in the SVB collapse. The SVB crisis will cause banks to pull back on lending but not nearly as much as in 2008 [5]. Eight out of 10 millennials say they regret buying their first home as they enter one of the most expensive housing markets in United States history. Last year, as the Federal Reserve dramatically increased interest rates from near-zero to the current 4.75-5% to reduce inflation, mortgage rates made home buying even more unaffordable for many. The high price of homes across the U.S. remains the number one barrier for 47 percent of millennials trying to purchase a home. According to the Real Estate Witch survey, 82 percent of respondents were unhappy with their home purchase decision. Twenty-two percent of millennials believe their interest rate is too high, and 63 percent of survey respondents plan to refinance their mortgage once interest rates come down [6]. The SVB collapse could lower mortgage rates if the Federal Reserve backs off future rate hikes; the average 30-year fixed mortgage rate rose to 6.6% one week after the SVB collapse and currently stands at 6.28% the first week of April. As buyers and sellers navigate this rapidly evolving landscape, careful planning and a long-term perspective will be essential [7].

Repercussions on Underserved Communities

The repercussions of the SVB failure could harm underserved communities, and minority startup founders worry about financial support [8]. A February Crunchbase News analysis determined funding for Black-founded startups slowed by more than 50% last year after they received a record $5.1 billion in venture capital in 2021. Venture funding dropped from $337 billion to $214 billion, and Black-founded startup funding dropped to just $2.3 billion, or 1.1% of the total. Historically, smaller and minority-owned banks have addressed funding gaps that larger banks ignored or even created, following exclusionary laws and policies as they turned away customers. At its peak from 1888-1934, there were 134 black-owned banks; today, there are only 21. Some minority-owned banks have seen customers withdraw funds and move to larger banks despite most minority-run banks having a more traditional customer base with secured loans and minimal risky investments. Fortunately, within the last three years, the federal government, private sector, and philanthropic community have invested heavily in minority-run depository institutions [9]. The National Bankers Association, which promotes minority-owned financial institutions, assured customers that their deposits are safe at banks because minority banks are not exposed to riskier asset classes like SVB and Signature Bank, which have high concentrations of crypto deposits and volatile venture capital [5].

Community Development Financial Institutions

Community development financial institutions (CDFIs) can be created to help underserved communities and support entrepreneurs in rural and urban areas. CDFIs ensure usability in underserved communities where people may not have as much experience with traditional banking by offering competitive capital options, technical assistance with business planning, and other advisory support programs [8].

Rudolph Metayer
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