Just Settle Down Over Silicon Valley Bank

Yes, there was an important bank in the area that collapsed. If you’re an investor, you’re probably out a lot if not all of the money you invested, it’s true. However, if you were a depositor, you just need to take a deep breath and step back for a minute.

Although it has been 2 years since any bank failed, and much longer since any bank this size failed, the failure of a single bank isn’t going to disrupt the economy. From the outside it doesn’t even seem likely to significantly disrupt the disruptor economy. Yes, it is certainly being felt by every Etsy seller who can’t get paid or by Roku with their $487M cash on deposit. But everything could be resolved as early as Monday afternoon.

As advanced as Silicon Valley Bank seemed it was a surprisingly classic failure: a garden variety run on the bank. Banks don’t just sit on their deposits, but rather put those deposits to work funding mortgages or startups, or whatever they’re going to fund. SVB wasn’t doing well because their stock wasn’t competitive with the recent interest rate hikes, so they were contemplating issuing more. This sparked a VC to panic and tell all their startups to pull all their money. This was largely do to the problem that all those startups had a lot of the money that was invested actually in the bank and those deposits were well above the maximum that was insured if the bank’s assets didn’t cover the deposits.

Those startup founders withdrew all they could then told other founders, which in the end resulted in a classic run on the bank – only faster than any fleet of tellers could manage because it was all done electronically. So the state had no choice but to shut it down and hand it over to the federal insurers because it had escalated out of control.

FDIC Insurance

Each deposit account is insured up to $250K. If you run a meaningful business, you recognize that isn’t a lot of money. However, that is the amount that the FDIC would give you, per insured account, guaranteed so you can take care of your immediate needs: make payroll, pay suppliers, or whatever cannot be put off. The FDIC’s Insurance Estimator can tell you about your situation if you have deposits there.

For deposits beyond the insured amount, initial estimate were that money should come in more slowly as the loans are sold off. As it turns out, the FDIC was able to do a meaningful assessment and every single deposit was covered. There were questions of whether companies would be able to make payroll in the next week or so, but as it turned out, because the bank was certain the deposits would be well-covered.

Silicon Valley Bank was unique in that it would make loans that were a bit more risky to tech startups. Some argue that they were too careless with the valuation based on default rates for those loans, but because there were actual investments in the bank, the depositors did not lose anything as a result of any bad decision made by the bank.

Second Largest Failure

Reports are in that Silicon Valley Bank is the second largest failure in US banking history. Significant parallels may be drawn between SVB and the first largest, Washington Mutual. Both instances were exceptional in that regulators did not not wait until close of business on Friday to shutter the banks because of big runs leading up to the failures. However, WaMu’s story took place on the backdrop of the much more complicated global financial system failure that included not only insured banks but uninsured brokerage firms. This was different from SVB which only saw the company of some small, specialized cryptocurrency firms.

Much like WaMu, SVB’s assets were sold off to another bank and no FDIC funds were required to make depositors whole. The investors in SVB were not so lucky and it will be some time before they see anything back from the failure, if they get anything at all. It was more or less a fire sale. There is a lot of criticism about this floating around relating to the failure, but the fact is that it was just the investors who came up short.

Neither the government nor the FDIC used taxpayer money to “bail out” the depositors… they used the shareholders’ money. The wisdom of many of the loans the bank made may be called into question, as the value the FDIC was able to sell them off was about 60 cents on the dollar, and the FDIC had to further back them by offering to cover half the value of all loans that default. This means that the shareholder investment will likely be completely locked up until all of the outstanding guaranteed loans have either matured or defaulted.