“Withdraw your money immediately!” Among Californian entrepreneurs, panic spread in a few hours last Thursday. In the red because of investments penalized by the rise in interest rates, Silicon Valley Bank (SVB), the bank of start-ups, faced an unprecedented wave of withdrawals. When she could no longer meet them, the 16th American bank was closed by the authorities. It is the second largest retail bank failure in the United States, and the largest since the 2008 financial crisis.
Two other establishments, themselves exposed to the crypto crash, sank, Signature Bank and Silvergate. And on Monday, the shares of two western American banks, First Republic and Western Alliance, plunged 60 and 47%. To avoid contagion to the rest of the sector, the Fed, the Treasury and the Deposit Guarantee Agency (FDIC) have taken exceptional measures to guarantee the integrity of SVB’s deposits. Even if Bruno Le Maire called for calm and assured that the French system was not exposed – a refrain repeated throughout Europe – the panic “is often not rational”, warns David WesselDirector of the Hutchins Center on Monetary and Fiscal Policy at the Brookings Institutionand author of In Fed we trust.
Why did SVB collapse so quickly?
SVB grew at full speed. It has attracted huge deposits, especially from start-ups and other Silicon Valley firms. The banks do not let this money sleep, they hope to earn a little more via investments than what the deposits cost them. SVB has invested heavily in Treasury bonds and government-guaranteed bonds. This worked well until interest rates were raised sharply, which drastically reduced the value of its bonds in the markets (compared to recent ones). It wouldn’t have been a problem if SVB had held them to maturity – they are safe investments – but SVB couldn’t wait: faced with the withdrawals, they had to sell other bonds at a loss. This triggered a bank run (bank panic) classic.
A bank run in the United States in 2023, how is that possible?
THE bank runs are largely a thing of the past in the United States, as insurance with the Deposit Guarantee Agency (FDIC) covers up to $250,000 per bank account, which is enough for ordinary mortals. But almost all SVB customers had more than that. They therefore had every interest in being the first to withdraw their money.
Is it bad luck or did the leaders of SVB make a mistake?
SVB violated the two fundamental principles of the banking industry: it did not diversify the source of its funds or its investments. It took large rate risks without hedging its positions against a possible rise. Its supervisors, the Federal Reserve and the State of California, have done nothing, as far as we know, to stop this madness even though there were many warning signs. The rapid growth of a bank, in particular, is often a sign that an institution is taking shortcuts.
SVB had 200 billion in assets for 175 billion in deposits, and more than 90% uninsured. Is this normal?
It’s completely atypical and a silly risk.
What measures have the authorities taken?
The Treasury, the Fed and the FDIC invoked “systemic” risk and announced that all depositors would get their money back, even if they had hundreds of millions of dollars over the guaranteed deposit limit. The Fed will also help banks that own bonds that have fallen in value because of rates. This is not a rescue (like in 2008). SVB investors will not be compensated.
Why 100% cover start-ups and wealthy investors who have taken a risk with unsecured funds?
The authorities weighed the pros and cons and decided that penalizing depositors, who benefit here from insurance for which they have not paid, would have risked causing a wave of withdrawals in other banks and destabilizing the entire financial system.
According to the Biden administration, taxpayers will not pay their way, is that correct?
If SVB doesn’t have enough assets to pay all depositors 100 cents on the dollar, then the FDIC insurance fund would take a hit. If necessary, the fund could impose a contribution on all banks in the country. And they usually pass that cost on to their customers. Technically, taxpayers will not pay through taxes, but they will probably do so through higher bank charges or lower remuneration on their savings account.
What are the risks of contagion to the rest of the United States and to the global financial world?
There was a high risk of contagion, and it is not yet known whether the measures taken will be sufficient to prevent the panic from spreading to other banks. THE bank runs are sometimes rational behavior on the part of certain individuals, but when all customers rush in for their own benefit, everyone suffers. And panic is often not rational. Institutions and investors may get scared and start selling. I don’t see how anyone can be certain that this storm will remain isolated to a few US regions and that skies will clear quickly. We just don’t know.