Silicon Valley Bank’s Fall and the Way Forward for US Banking

Silicon Valley Bank suffered probably the quickest bank run in history and the fastest bailout of depositors, too. The lender to the venture capital industry had operated under lighter rules and fewer restrictions than larger banks after a successful lobbying effort back in 2018. Until a few weeks ago, it was judged too small to cause any real damage if it hit problems, but the moment it got into trouble, everyone realized it was systemic after all.

In fact, the scale of SVB’s deposits rescued wasn’t much smaller than Washington Mutual, which failed during the 2008 meltdown and was taken over by JPMorgan Chase & Co. Depositor bailouts aren’t as rare as you might think. In the past 22 years, depositors at failing banks have been helped more often than they have been hurt in bank failures. Typically, a mix of public backstops and white-knight acquirers assume these obligations.

Why did SVB fail? The basic story is that it grew very fast, nearly trebling deposits in just three years, and its managers took too much risk by plowing most of its spare cash into long-term, mainly government-backed, bonds. Then when the Federal Reserve rapidly raised interest rates, the value of these bonds dropped, leaving SVB in need of extra capital.

SVB’s deposits ballooned at a time when investors were throwing money at startups, betting on high returns from future growth while returns on many other assets were suppressed by ultra-low interest rates. Its depositors were similar companies prone to act in similar ways, which would prove part of its downfall. But strong deposit growth and excess cash have been the trend among banks for years. Bank balance sheets have become a lot more liquid and most banks have put a lot more depositor funds into Treasuries and other bonds, just like SVB