Silicon Valley Bank (SVIB) did not have enough money to cover deposits and, despite being a federally insured bank that depositors should trust with their money, suddenly couldn’t give customers their money as withdrawals rose. Sounds bad, right? Sounds possibly criminal, even—and really scary. Banks are supposed to be safe, and they usually are. But this is the largest bank default in U.S. history, and the last time we saw something that big was in 2008, which started the worst recession in living memory.
Of course, many journalists and talking heads are tripping over themselves with the scary headlines, the ragebait teasers, and the supposed bombshell revelations. And that is making everything look worse, more scary, and more enraging. But if we look at all of this with cooler heads…should we be angry? Or scared? Or feel any emotion at all?
SVIB’s failure is actually a very boring story. Like all banks, SVIB’s job is to earn a higher interest rate than it pays out for deposits. This is very easy to do in most market conditions, but in very quickly rising interest rates where the value of U.S. Treasuries fall quickly, cashing out bonds to pay out depositors’ withdrawal requests can result in a massive financial loss. Regulations and banking standards have methods around this, such as having two accounting categories of bonds: those held to term and those that can be sold before their due date for liquidity purposes.
Possibly, SVIB did not sufficiently account for withdrawals and thus did not have enough bonds that were categorized as sellable to sell before hitting the regulatory limit. Most likely, however, this was not the case. Much more likely, and more and more analyses from Wall Street are making this argument, SVIB’s exposure to the now struggling tech startup sector meant it had too many clients demand money at once, something exacerbated by its recent 8-K release and VC chatter about the disclosure.
And, in all honesty, what was disclosed is scary for SVIB depositors (but, it should be stressed, not for anyone else). SVIB’s failure to stay within capital regulations resulted in a less-than $2 billion shortfall, less than 1% of the company’s total client funds and assets on hand. That shortfall wouldn’t even cause problems for any firms but a bank: after Basel III, banks are required to have Tier 1 capital (i.e. the most low risk such as U.S. bonds) of 3%. The $2 billion shortfall resulted in hitting a 0% Tier 1 capital ratio, which resulted in the failure and FDIC’s intervention. Now all depositors will be made entirely whole in a move that sees the Federal Reserve offer liquidity at zero cost to SVIB and to the Fed.
This is being painted as a political nightmare by pundits whose job is to make things appear as political nightmares, but it’s a very orderly and responsible action that minimizes moral hazard: depositors had no reason to believe they were exposed to risks, but shareholders will see losses and management will get fired.
Similar bank failures are happening elsewhere at tech-oriented banks, but we also saw Credit Suisse (CS) get knocked down heavily as their largest investor said they would not go about the 10% regulatory threshold in their current stake in the Swiss bank. After years of losses and scandals, such a move is logical, but pattern recognizing humans are eager to see a connection between this and SVIB’s failure, given how close they are to one another. But there is none; in fact, Goldman Sachs (GS) earned a tidy profit from SVIB’s loss, and it is possible that CS earned a bit of profit from SVIB’s or another bank’s failure, too. The devil is in the details, and analysts who dig deep are the ones who earn the largest profits.