Column: The collapse of the Silicon Valley bank is Silicon Valley’s problem, not yours

All banking crises throughout history have had a common element: short-term savers try to withdraw their money from institutions tied to long-term assets.

If all savers try to get out at once, the result is an old-fashioned run in the bank. The bank can find the money to pay it, in which case the crisis will be over, or not, in which case it will fail.

These crises tend to take on the color of their contemporary landscapes. Say hello to Silicon Valley Bank.

This Santa Clara-based lender to Silicon Valley startups was shut down Friday by California’s Department of Financial Protection and Innovation and transferred to the Federal Deposit Insurance Corp. (FDIC) as the receiver.

The FDIC says all insured depositors — meaning those with bank balances of up to $250,000 — will have full access to their insured deposits by Monday.

Uninsured savers will receive an “advance dividend” next week, and a share for their uninsured funds. The FDIC says they’ll eventually get more of their money back, but didn’t say how much or when. The agency also advised the bank’s borrowers to continue making required payments on their loans.

The bank reported last year that 87% of its deposits were uninsured — a sign of the past year’s rapid growth in Silicon Valley’s hyper-stressed economy.

The collapse of the bank sparked a predictable round of hands-wringing in the financial commentary. At one point on Friday, shortly after the announcement by California regulators and the FDIC, a blurb on CNBC.com linked the bank’s collapse to Friday’s loss in the Dow Jones Industrial Average, the fourth consecutive day of the fall of the Dow.

Another headline claimed that “the Silicon Valley banking crisis is rocking America’s biggest banks.”

But it’s incredible, to say the least. Friday’s fall in stock markets was almost certainly a result of the early morning jobs report, which showed better-than-expected job growth and raised the prospect of more bogus rate hikes from the Federal Reserve.

(Days 1, 2 and 3 of the stock market swoon followed the testimony of Fed Chairman Jerome H. Powell Tuesday, who indicated he thought more rate hikes were imminent to quell inflation.)

As for the largest banks, if they are ‘shuffled’, that is quite a small volume. At the time of writing, JPMorgan Chase is up 2.5%, Wells Fargo is up 1.34%, and Bank of America and Citigroup are essentially flat during midday trading on the New York Stock Exchange.

So what happened at Silicon Valley Bank?

Based on the information made public, the bank unwisely put its eggs in one basket by accepting deposits from an isolated group of depositors: corporate-funded companies. Some reports claim that the bank has done business with nearly half of all venture capital-backed technology and healthcare companies in the US. The bank boasted of its role as “financial partner of the innovation economy”.

Apparently the bank didn’t follow Mark Twain’s comment: “The wise man says, ‘Put all your eggs in one basket and – LOOK AT THAT BASKET.’

The bank paid no attention to their basket. It used the funds of its depositors, repayable at any time on demand, to purchase long-term government bonds. Bloomberg commentator Matt Levine rightly calls this “boring maturity mismatch and lack of deposit diversification”.

Investing in government bonds with staggered maturities – from 1 year to 30 years – is completely safe, as the US has never defaulted. When the bonds mature, you can be 100% sure that you will receive your principal plus nominal interest.

In the meantime, however, the value of these securities will fall if interest rates rise (and rise if interest rates fall). If you need to sell too early, you can take the plunge. This is the basic history of Silicon Valley Bank.

The vast majority of the bank’s depositors have been start-ups that have been born in the near-zero interest rate environment over the past decade. This is the period in which the bank bought bonds.

The bank seemed destined for almost limitless growth – with assets in excess of $200 billion, it is the 16th largest bank in the country, despite being almost unknown outside of Silicon Valley. Its market cap reached $44 billion in October 2021.

When last listed on the Nasdaq on Thursday, the market value was less than $6.3 billion and on Friday it was practically zero.

But as far as the banking sector as a whole is concerned, it was still a small iron. JPMorgan’s assets were approximately $3.7 trillion at the end of 2022 and its market capitalization was $388 billion.

In early 2020, the Fed put interest rates on an upward trend, raising rates by 4.75 percentage points in 2022 alone. This alarmed the bank’s depositors, who began withdrawing money. Their interest-related spending increased and their ability to raise new rounds of financing declined as the companies that propped them up slowed their investments.

When the bank announced on Thursday it was seeking new capital, venture capitalists like Peter Thiel advised their portfolio companies to withdraw their money, fueling the exit rush.

Silicon Valley Bank suffered a loss of about $1.8 billion in a $21 billion long-term debt sale that closed Wednesday, the bank said. It also held about $91 billion in securities it planned to hold to maturity.

The bank announced Wednesday that it is seeking $2.25 billion in new capital through an equity offering. The bid reportedly fell through, leading to the government-ordered closure.

The bottom line is that the history of the bank is ancient history. Only the glamorous outfits are new. Is this a harbinger of a broader economic slowdown? Probably only if you think that the “innovation economy” is the whole economy, which today is always more questionable and unworthy than ever.