I had never heard of Silicon Valley Bank before last week’s news that they suffered a bank run that seemed more like an accident and overreaction more than anything. Twitter was reeling over the weekend as the FDIC and Fed took the helm and shut down SVB due to the severity of the bank run largely caused by a tight circle of Twitter venture capitalists with massive assets in SVB. People who have been covering this story talk about Silicon Valley Bank like a country club but for tech venture capitalists. The depositors seem to know each other because the tech industry holds a majority of the assets in this bank and they keep in contact with each other. The bank has a real “finance & tech bros bank here” vibe to it.
Silicon Valley Bank was the 16th largest bank in the U.S. with around $200 billion in assets. It was considered a regional bank with not a lot of systemic risk attached to it because the bank wasn’t the size of a Wells Fargo or Citi bank. However, the bank’s majority of uninsured deposits was a very big risk. The FDIC (Federal Deposit Insurance Company) will insure accounts with $250,000 or less in the event the bank cannot give money to its depositors, like during a bank run. The Washington Post reported that SVB had $151 billion in uninsured assets, or 93% or the company’s total assets. On average, half of the assets or deposits in a bank are uninsured because they amount to more than $250,000. As I mentioned before, most of those accounts at SVB are involved with the tech industry, an industry that is seeing huge amounts of job cuts in the last year.
Before its ending, Silicon Valley Bank held assets in treasury bonds, a long term investment with a maturity date. The problem with these assets is that when the Federal Reserve increased interest rates to curb inflation, the value of the treasury bonds decreased. Bonds are usually a safe and long-term investment, however, their value goes down when interest rates rise. In addition to their value, they also lose value if you cash them out before their maturity date. SVB needed cash to pay their depositors, but a lot of their assets were tied in treasury bonds, which aren’t easily liquidated. Somehow a few venture capitalists, Peter Thiel for example, found out that SVB can’t pay back their depositors because their assets were tied to long-term holdings in bonds, which were losing value because interest rates set by the Federal Reserve were increasing. What did Twitter and all the investors in SVB do? They screamed from the mountain tops that SVB couldn’t pay its depositors so go get your money while you still can. And it worked. Depositors lined up outside the bank to cash out their deposits while the bank was still open. Just days later the FDIC would step in and close the bank for good.
The FDIC did something very different after it took control of SVB. They ensured every depositor would have access to their cash that following Monday, not just the insured accounts. Initially, they tried to find a buyer to take over the bank’s assets. The bank was shut down in the end. The FDIC acted swiftly to control the possible “contagion” — the effect that causes other runs on banks. Should smaller, regional banks be considered a “systemic risk”? $200 billion in assets isn’t insignificant. I think assets are worth noting when deciding the level of regulation a bank should be subject to. I also think it is worth noting the amount of uninsured assets a bank has. Because the uninsured assets were really the driving force for this run, since the majority of the deposits in SVB were uninsured. The aftermath of this mess can show us the change in federal involvement in bank failures. Will the FDIC continue to insure accounts amounting to more than $250,000 in the future when a bank run inevitably happens again? How will the level of “systemic risk” a bank has be evaluated in the future? How could this bank run have been avoided if proper regulation had been in place? There are risks when a bank is involved with one particular industry. What if that industry fails? Maybe the bank’s investments weren’t risky, but hyper-focusing on one industry is risky. Holding assets in treasury bonds when interest rates were increasing didn’t seem like a wise move either. One can hope that other regional banks will learn from the mistakes that led to SVB’s downfall. I also hope that the venture capitalists on Twitter who demanded saving learn to appreciate and understand the benefits of regulation even though some of them lobbied against bank regulation back in 2018. In an already fragile economy, bank regulation sure seems like a good idea.