What went wrong: Pittsburgh experts explain failures of Silicon Valley, Signature banks

The federal shutdown of two banks is unique and not a symptom of a widespread problem, two Pittsburgh financial experts said.

“I do think that this is more of a unique situation in banking and not an overall barometer for what’s happening in the tech world,” said Dave Mawhinney, executive director of the Swartz Center for Entrepreneurship at Carnegie Mellon University.

“I’m hopeful that this will be an isolated incident that caused short-term disruption but no long-term negativity,” he said. “But we just never know with human nature.”

In this case, the U.S. closed the failed California-based Silicon Valley Bank, which had more than $200 billion in assets that catered to tech startups, venture capital firms and well-paid technology workers. It was the largest bank failure since Washington Mutual went under in 2008.

New York-based Signature Bank also failed. At more than $110 billion in assets, Signature Bank is the third-largest bank failure in U.S. history.

But these particular banks took risks that led to this moment, said Leming Lin, associate professor of business administration at the University of Pittsburgh’s Katz School of Business.

Silicon Valley Bank catered to venture capitalists whose deposits tend to be above the FDIC insurance threshold of $250,000.

“Because deposits higher than that figure are uninsured, these kinds of banks are more prone to runs,” he said Monday. “If investors are worried about that bank’s financial situation, they have a greater incentive to move their money elsewhere. And that’s what we saw happen.”

SVB needed to sell assets to cover the sudden withdrawals. The bank was heavily invested in Treasury bonds, which are meant for long-term investment strategies. But the rise in interest rates meant the bonds it held would be sold at a loss because their value dropped as rates rose.

Such bonds are not sold for a loss unless there is an emergency and the bank needs cash, the Associated Press reported.

The average person banking at their preferred institution likely has deposits below the $250,000 threshold protected by FDIC, so they’re fully insured and protected, Lin noted.

If you have more than that, you should look at how secure your money is, Lin said.

“But again, I think Silicon Valley is quite unique. I feel like in the case of Silicon Valley Bank and Signature Bank, there was something wrong with their fundamentals,” Lin said. “These banks, in some ways, were underfunded.”

Mawhinney said there could be some pain, but hopefully it won’t be for the long haul.

“It doesn’t mean that there won’t be failures, right?” Mawhinney said. “We’ve already seen startup companies prior to this that were capital intensive that ran into scenarios where it was difficult to raise new capital. So I’m not saying that the fallout from Silicon Valley Bank won’t mean there will be situations where some companies go out of business. But in general, it’s not going to lead to a long-term depressed startup market.

“I believe that there’s enough dry powder — as they call money that venture capitalists have raised from their limited partners that needs to be deployed — that early-stage companies just getting started are going to get funding. Because those are the seeds that are being planted for growth companies one, two, three, four years out.”

The companies that might be more strapped are the ones that are growing but not rapidly enough to meet expectations, he said.