What we’re reading (3/10): bank run edition
“Silicon Valley Bank Closed By Regulators, FDIC Takes Control” (Wall Street Journal). “Silicon Valley Bank collapsed Friday in the second-biggest bank failure in U.S. history after a run on deposits doomed the tech-focused lender’s plans to raise fresh capital. The Federal Deposit Insurance Corp. said it has taken control of the bank via a new entity it created called the Deposit Insurance National Bank of Santa Clara. All of the bank’s deposits have been transferred to the new bank, the regulator said.”
“Silicon Valley Bank Fails After Run Bby Venture Capital Customers” (New York Times). “If there is one enduring axiom in banking, it is this: Don’t run out of money.
Silicon Valley Bank, a lender to some of the biggest names in the technology world, did just that on Friday, becoming the largest bank to fail since the 2008 financial crisis. The move put nearly $175 billion in customer deposits, including money from some of the biggest names in the technology world, under the control of the Federal Deposit Insurance Corporation.”
“Startup Bank Had A Startup Bank Run” (Matt Levine, Bloomberg). “You are the Bank of Startups, and startups are a low-interest-rate phenomenon…When interest rates were low for a long time, and suddenly become high, all the money that was rushing to your customers is suddenly cut off….This is all even more true of crypto — I mean, the Fed raised rates once and the entire crypto industry vanished? — but it is not not true of startups. But if some charismatic tech founder had come to you in 2021 and said ‘I am going to revolutionize the world via [artificial intelligence][robot taxis][flying taxis][space taxis][blockchain],’ it might have felt unnatural to reply ‘nah but what if the Fed raises rates by 0.25%?’ This was an industry with a radical vision for the future of humanity, not a bet on interest rates. Turns out it was a bet on interest rates though.”
“Silicon Valley Bank Is A Very American Mess” (Financial Times). “Despite being the 16th largest bank in the US by balance-sheet size, SVB was apparently not subject to the “no more Dexias, no more HBOSes” regulation. The reason, as implied in the 10-K disclosure above, seems to be that a bank is only required to follow the NSFR and LCR rules if they have a certain amount of “short term wholesale funding”, and SVB’s liability side was dominated by deposits from corporate customers. Of course, as we’re seeing now, the fact that a risk isn’t covered by a regulatory ratio doesn’t mean it doesn’t exist. Although they grumbled and moaned back in the 2010s (NSFR compliance in particular was a big drag on European bank profitability), the European and UK banks basically managed to become compliant with the funding rules, which in many ways just codify sensible treasury management practices.”
“Silicon Valley Bank” (Marginal Revolution). “I am seeing estimates that over 97% of the funds are not FDIC insured, and many of those accounts are held by start-ups. An outright failure would be calamitous for the Silicon Valley start-up ecosystem…Note that every now and then the U.S. banking system is semi-insolvent, but matters work out because “on paper” losses do not have to be either realized or reported as such. Remember the 1980s? One danger is that if other banks start selling their bonds at a loss, the problems in the system will become increasingly transparent and compound themselves. That is not the most likely scenario, but it is something to watch out for.”
“Silicon Valley Bank Has Failed” (The Verge). “Silicon Valley Bank is important for venture capital firms and startups. But as the economy has changed, VC-funded companies burned through their available cash. Simultaneously, VC funding dried up. So Silicon Valley Bank’s deposits dropped faster than the bank anticipated.”
“‘It’s A Big F - - - - - - Mess’: How Silicon Valley Bank’s Collapse Is Creating Chaos” (New York Magazine). “Flow Health runs a network of diagnostic labs and provides COVID testing for clients in the entertainment industry. It’s headquartered in Culver City, California, with offices around the country. It employs about a thousand people, none of whom are getting paid this week. “We just have no way,” says Alex Meshkin, Flow Health’s CEO. ‘It’s a big fucking mess.’ He notified his employees this morning. They’re mad, and with good reason. Many are hourly workers living paycheck to paycheck. Some have threatened not to come to work or to quit. Others are just trying to figure out what the next week looks like. ‘You should see the messages in Slack,’ Meshkin says.”
“Silicon Valley Bank Dies But Its Disease Lives On” (Reuters). “Nearly three years with no U.S. bank failures just came to an unseemly end. Silicon Valley Bank, which counts among its customers half of all U.S. venture-capital backed startups, was taken into receivership by the Federal Deposit Insurance Corp on Friday after a slide in deposits and a hasty capital raising failed to restore confidence. By acting quickly, regulators have stopped one crisis, but may have laid the groundwork for more.”
“SIVB: Held-To-Mortem Governance” (Nongaap Investing). “With Silicon Valley Bank’s well-publicized blow-up underway, a question I have is when did insiders begin to realize they were potentially in trouble? Examining recent disclosures in the 2023 Preliminary Proxy, a governance-based argument could be made insiders were quite aware the situation was serious throughout 2022.”
