Silicon Valley Bank Collapse

Lots of bigwig Silicon Valley types are panicking and demanding a bailout - my suggestion is don’t listen to them. This situation is not a crisis.

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With a $1B+ book of loans to wineries, Silicon Valley Bank was heavily tied into the wealth of Northern California.

There’s a lot of news about the collapse of Silicon Valley Bank (SVB) on Friday. I tend to stay away from banking, but this collapse does have implications for competition policy because a lot of small firms that might one day compete with big tech use its services and are on the hook. Lots of bigwig Silicon Valley types are panicking and demanding a bailout - my suggestion is don’t listen to them. This situation is not a crisis.

Here’s my understanding of what happened and what it means. SBV is a moderately large bank with roughly $200 billion of assets. It lends to rich people, private equity and Silicon Valley firms, and is pretty weird as banks go, with a $1B+ loan book outstanding on premium wineries alone. 95% of its deposits are above the Federal Deposit Insurance Corporation limit of $250,000, which means many accounts with funds exceeding that amount are uninsured. That’s highly atypical, and makes SVB vulnerable to a bank run.

In 2018 banks under $700 billion of assets succeeded in lobbying Trump and a Republican Congress to get out from bank rules, like needing to have enough cash on hand to pay back depositors easily, known as a liquidity requirement. The Fed then implemented those rules in a bank-friendly way, contra the wishes of then-Vice Chair Lael Brainard, who warned of potential bank problems like SVB in 2019. That’s likely one reason SVB got into trouble, because it used its political power to eliminate the regulations that would have forced it to have enough cash on hand to stop a bank run. (SVB CEO Greg Becker sold his bank stock just before the collapse, so the sleaziness hasn’t stopped.)

Anyway, in 2019, SVB started piling into bonds, accumulating a portfolio of $100 billion such securities. These bonds go down in value when interest rates go up suddenly, so this was essentially a giant bet on interest rates, made with depositor cash. In 2022, the Fed jacked up interest rates, and ultimately, SVB lost a lot of money. Uninsured depositors started to panic, and the FDIC shut the bank down and is beginning liquidation. Thousands of small firms were locked out of their accounts, and couldn’t meet payroll.

Because nearly all deposits are uninsured, and the FDIC has to resolve the bank in a manner that is least costly to the FDIC insurance fund, it doesn’t make sense to sell SVB to another bank. It will be wound down. That said, the FDIC knows what it is doing, this isn’t 2008 and this is more a temporary inconvenience than anything else. These assets are solid if slightly lower in value, and the losses probably aren’t going to wipe out very much of the depositor money. I could be wrong about that, there might be some fraud, but so far I haven’t seen indications of it.

What’s going to happen is that on Monday, depositors will have access to $250,000 of cash. Over the next few days, depending on how bad the losses are, the FDIC will give customers access to most of their uninsured deposits. The rest will be available, minus losses, over the next two to six months. And there are indications that even among firms holding funds at SVB far in excess of the $250k limit, the situation is annoying but manageable.

The lesson here is that banks should face more stringent regulations, and that we need a central bank digital currency so small businesses, nonprofits, and municipalities can keep cash risk-free at the Fed if they want to do that. There’s no reason to force them to give their cash for safekeeping to gamblers.