Why are people waiting in line to get into the bank? I thought we didn’t need brick and mortar banks anymore, or real people to talk to. 

I thought of several titles for this month’s insight:

“The Madness of Crowds”

“Follow the Herd”

“Let’s Create a Crisis in the Banking Sector”

Two weeks ago Silicon Valley Bank failed. The more I read about why the bank failed, the more ironic it seemed.

The business of Silicon Valley Bank was based on the technology sector. For over 40 years the bank was home to start-ups and venture capital investors.

Focusing on one sector made Silicon Valley Bank unique. Before the technology sector took off, the bank was more of a small community bank. As wealth grew for technology companies and individuals the bank grew in size, from a small bank to a large bank with assets over $200 billion. At $200 billion the bank fell under the definition of systemically important.

The depositors were unique. They represented the community comprised of start-ups, venture capital and newly wealthy individuals. The bank was called “our bank”  by the customers of SVB.

Silicon Valley Bank made loans to start up companies. Companies more “traditional” commercial banks would not lend to. 

Start-ups by definition have a high demand for cash. Cash supplied by venture capital investors.

The “cash turnover” at SVB was higher than in large, diversified banks where deposits can sit for years.

The investment portfolio of the bank held long term treasury bonds. Interest earned from the investment portfolio covered cash withdrawals.

There’s no crime investing in US government backed securities. Treasuries are considered a safe investment.

Safe is the not the same thing as realizing that bond prices are sensitive to changes in interest rates. When the Fed began raising rates a year ago, bond prices began to drop. Not just for Silicone Valley Bank but for all bond holders.

Once interest rates start to move up, bond prices go down. On a 30-year treasury the change in price is magnified by the long maturity (*duration*) of the bond.

Because Silicon Valley Bank held long dated Treasury bonds, the value of their portfolio sank. When Silicon Valley Bank needed cash to pay depositors, they were forced to take losses on the bonds they sold.

The bank made mistakes. Everything they did spelled RISK.

1. They did not diversify their investment portfolio.
2. They did not hedge the bond portfolio against rising rates to mitigate interest rate risk.
3. The depositors were not a diversified group of individuals or businesses in the sense that they were start-up companies. They had a constant need for cash.
4. The bank had no risk management systems in place. Like asset and liability matching.
5. They were highly leveraged, not in the financial sense but in the sense their business was highly concentrated in one area. The equivalent of investing ALL your money in the technology sector.

As one astute commenter said: “They failed banking 101”. And yet the Federal Deposit Insurance Company (FDIC) stepped in quickly and assured depositors they would be made whole. Even depositors who technically were NOT insured.

The failure of Silicon Valley Bank immediately led to crisis thinking. Stocks in the banking sector dropped as did stocks in every other sector as investors imagined a 2008-2009 scenario.

What happened in 2008-2010 bears no resemblance to the failure of Silicon Valley Bank.

With a booming mortgage market and low interest rates, making mortgage loans became big business. Until loans started to fail. On a massive scale.

Silicon Valley did not fail because of bad loans. 

Silicon Valley Bank did not fail because it invested in derivative products.

Silicon Valley Bank was not a bank making NINJA loans (no income no job application).  

Quite the opposite. 
 

Bank Failures in Brief – Summary 2001 through 2023

There were 563 bank failures from 2001 through 2023. Please select the year buttons below for more information. 

FDIC: Bank Failures in Brief

The failure of Silicon Valley Bank is not going to lead to a nationwide banking crisis.

What do we know about the “run on the bank”? 

I imagine the ability to make instantaneous payments (and withdrawals) comes from technology that was developed with help from lenders like SVB.

In my version of the run on the bank, it started with the equivalent of someone yelling “fire” in a crowded theater. Once word got out for everyone to “run”, that is exactly what happened.

Once someone said “fire,” the bank was toast.

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