Someone who's good at the economy but not in a "we gotta kill homeless people to make the line go up" way, what's the deal with the silicon valley bank going bankrupt
So, Silicon Valley Bank is a bank that focused on serving business clients in the tech sector, both startups and the venture capital firms that funded them. Lotta money there, right? Right! Well, they spent all that money making more money , and not very much of it doing things like building infrastructure or making their services actually, like, good. Which is a problem.
The way banks work these days, when you hand them money they don't just put it in a room and lock it up. It's all electronic anyway, so there's no really much to lock up. Instead, they add numbers to your balance and take that money and use it for other things. IE you put $100 in your savings account, they write down "You have $100" and occasionally update it as your savings earns interest, then they take that same $100 and hand it to someone else as a loan. This does mean that they don't, technically speaking, have your $100 anymore. If you hit up an ATM and pull your $100 out, they'll hand you someone else's $100. That is normal and expected bank operation, and as long as they aren't idiots it isn't a problem.
Recently, some badly-timed business decisions on their part sparked a bank run. Bank runs are when depositors at a bank all freak out and try to pull their money out at the same time. If no one is putting money in and everyone is pulling money out, and they don't technically keep all that money on hand... well, that is a capital-P Problem. They can't hand you someone else's $100 if that person is also asking for their $100 and so is everyone else.
Now, we know this is a problem. This made a very big fucky-wucky about 90 years ago when the Great Depression happened. So in the wake of that clusterfuck, the government created the Federal Deposit Insurance Corporation, or FDIC. FDIC insures deposit accounts (checking, savings, CDs, etc) up to $250,000 per bank per person. Even in the event of a massive bank run and every single person pulling out every single dollar all at once, you will get your $250,000 back. Above that, it depends how much money the bank can scrounge up and how many people it has to make good to.
Now, the reason this continues to be a capital-P Problem for SVB is that thing I said right at the start.
Silicon Valley Bank is a bank that focused on serving business clients in the tech sector, both startups and the venture capital firms that funded them. Lotta money there, right?
$250,000 is a pretty hefty chunk of change for an individual human person. If you have that kind of money in cash, you're probably not keeping it all in a bank deposit account anyway, because it's earning 0.01% interest and therefore getting chewed down by inflation constantly. But a business may absolutely need to keep that kind of cash on hand, because that is the cash they're using for things like, oh. Paying employees.
So while we can point and laugh at Silicon Valley tech bros and the kind of cowboy startups that try to pay their employees in beer and worthless stock options losing money, this is also hitting a lot of ordinary people via their employers' sudden loss of payroll funds. Etsy, for instance, used SVB, and now their ability to pay all the folks selling their work on Etsy is, to use a highly technical term, super fucked up.
FDIC is doing their do, which means that depositors will be getting back their up-to-$250,000. This is, like all processes involving money, highly bureaucratic and slow-moving. It kind of has to be, because when there is a chance to be handed money, there are loads of people who will lie their asses off in order to get in on the action. So FDIC has to validate all the depositors and make sure their balance claims are genuine &etc before they can fling money around, and they're working on selling off everything SVB owned in order to make them make good on it as much as possible. But in the meantime, folks aren't getting paid and also it's making people in the business world look nervously at the rest of the financial sector, because banks are a pretty incestuous pile of daisy-chained handjobs. The last time there was a Big Bank Problem was the 2007-2008 crash, and the collapse of a couple big financial institutions took down a ton of big respected money names. So everyone is freaking out.
This is all correct.
Here is another layer:
The amount of money that a bank is required to keep on hand, just in case, is regulated. The government has a vested interest in keeping the banking system running, right? So they require the banks to keep a percentage of the assets (their member's money) set aside so that if there *is* a sudden rush of withdrawls or an investment turns up bad, then they can still pay.
Because here's the deal: Big banks dont just use members' deposited money for loans. They also use it to invest in other businesses. They are betting that the business that they have invested in via stocks, bonds, or whatever (or loaned money to or all of those things) will do well and pay back their investment plus extra.
Federal regulations tell the banks to set aside a portion of their total money so that it WON'T be loaned out OR invested.
Well, back in 2018, Congress and the President (guess who!) decided that regulations were actually terrible and got rid of a bunch of them. Their goal was to stimulate the economy by making it easier to do business. Unfortunately, a lot of those regulations were made in the first place to stop terrible things from happening. (Like bank runs. Or mass poisoning via poor food production practices. Or train derailments because of over stressed infrastructer and increasingly stressed, understaffed workers. Just to name a few examples.)
One of the regulations they tinkered with was the amount of money that banks are required to keep in reserve. They lowered that amount by a lot.
Surprise, surprise, banks were like, "holy snap, we can spend so much more money now!!!" And promptly did so, using all of the money above the new, lower, legal cap for things like loans and venture captial investments. Aka, risky investments. High risk, high reward.
SVB did this, and made some bad investment choices. They lost a bunch of money. Because of the relatively recently lowered regulations, SVB had way less money on hand, meaning they couldn't absorb the loss from their bad investments. A few important people (ngl i forget who) advised folks to take cash out of their accounts.
In the world of electronic echanges, no one needs to physically go to a bank to get their money. They just pop on the app on their phone and do an electronic transfer.
The withdrawls quickly became a full on Bank Run as word spread and EVERYONE raced to get their money out while there was still money to get.
SVB fell in less than 48 hours. This is *shockingly* quick.
So the problem isnt just that everyone all together ran off to get their money from the bank, it's ALSO that the bank regulations got lowered and SVB used every extra cent they could to bet on other businesses and then when they lost that money they didnt have much left over to give to people when they demanded their money back.
Correct!
Making it even more byzantine, a lot of SVB's problematic investments weren't even the ones traditionally considered risky, though. (NB: there are many many flavors of financial risk, but that's a whole post's worth of digression all on its own.)
In fact, it was their SAFEST investments (other than, you know, the cash they should have been keeping on hand but weren't due to all the above wrt deregulation) that helped bring them down.
So, normal banks invest and give out loans to earn money with your money. SVB, serving VC firms and startups, wasn't doing much in the loan business, so they had to find alternative means for bringing in cash. One of the alternatives they found was in buying Treasury bonds.
Now, Treasurys (and yes, that is how they're pluralized here in the industry, and it makes my soul weep) are generally considered the safest thing you can buy that falls under the definition of "investment." They are debt instruments, meaning a commitment to pay back face value, and they are drawn against the full faith & credit of the US Government. Treasurys are what your 80yo Grandma buys to get a steady income and no risk of her purchase going bankrupt.
But here's the thing. Treasurys pay back their face value on a set date, called the maturity date. If you need to pull your money out of them before that date, you're going to have to sell them to another investor, and that might pay you more or less than the face value. Sometimes a LOT more or less.
Here's the other thing. The resale value of Treasurys, like all debt investments, rises and falls based on current interest rates, because they pay interest based on whatever interest rates were at when they were first issued. If the Treasury puts out a bond that pays 1% interest for 10 years, and then six months later they put out a bond that pays 3% interest for 10 years, that 1% bond no longer looks like such a great deal, and to find a buyer you'll have to sell it at a discount. There is a lot of math that goes on here, but that's the principle. Rising interest rates = old bonds get cheaper.
And what's been happening like CRAZY recently? You got it - rising interest rates.
So this would have been temporarily painful for SVB if not for the bank run. They would have watched their bond holdings show painful market values, but they could have continued to hold them and wait for things to hopefully cool down and at least stabilize.
But then the bank run happened, they needed cash urgently, and they had to face the prospect of selling those Treasurys for a whole lot less than they'd bought them for, meaning that the cash they'd parked there was now a lot less cash. And in a bank run, where they really really needed cash...
(If this was a harder explanation to follow, don't sweat it - for my licensing class, the section on how debt investing works was where everyone started crying.)
This is a fantastic post. I want to touch on one more thing with an addition of a video. And please correct me if I get anything wrong.
Here is a relatively short investigative news segment where they follow the FDIC as they take over a bank. I found it really interesting and actually comforting, especially because it shows that thereâs support for the bank employees and the customers. Even if itâs shocking for them, there is continuity of employment and services. Itâs a crappy day all around, but nobody ends up penniless. They even launch the whole procedure overnight so that the bank opens the next day as normal.
Additionally, for anyone from the human-sacrifices-to-the-line crowd who starts screaming at you that this is a âtaxpayer-funded bailout of a âwokeâ west-coast soyboy bank,â you can just flatly tell them that theyâre wrong. Our money--our taxpayer money--does not make up the funds the FDIC uses as remedy in these situations. That money comes from their own reserves from, essentially, the dues that banks pay to be covered by the FDIC.
âThe FDIC is not supported by public funds; member banks' insurance dues are its primary source of funding.â (Bovenzi, John [2015]. Inside the FDIC: Thirty Years of Bank Failures, Bailouts, and Regulatory Battles. New York: John Wiley & Sons. ISBN 978-1-118-99408-5. p. 69.) (Also from about 5:30 of the video above.)
They are backed by the US Government, so they can tap the Treasury Dept. if they need to (that is, if the FDIC has to rescue so many banks that it runs out of its own funds). So banks can fall, but the FDIC canât fall.
Because SVB catered to so many businesses, there were many accounts with a value over $250,000--the FDIC and the Federal Reserve already announced that they will make those companies whole by ensuring their access to all their deposited cash, even over $250,000 (https://fortune.com/2023/03/13/how-does-fdic-insurance-work-silicon-valley-bank-implosion/). And they still wonât be touching taxpayer money to get it done:
âNo losses associated with the resolution of Silicon Valley Bank will be borne by taxpayers,â the FDIC said in a press release. Â The money will come from the Deposit Insurance Fundâwhich is mainly funded by quarterly fees levied on banksâas well as liquidated assets from SVB. Those losses to the fund âwill be recovered by a special assessment on banks, as required by law.â
