After predictions that the Fed would step in, that it was too big to fail, and more, Silicon Valley Bank failed.
And while bank failures have become much rarer in the modern era, the harsh reality is they still happen. The FDIC putting SVB into receivership and looking for a sale is completely routine.
Because people asked for it, I’ll get into the details.
Panicking about your money at SVB? Here’s the TLDR:
- If you have less than $250k, you’re covered by FDIC and should have been able to access it by this afternoon.
- If you’re above $250k, what happens next depends on what happens with SVB’s sale. Follow the instructions in the bulletin, call in, file the claim, and wait. In general, most modern bank failures have had all deposits covered. But don’t take my word for it; look through the publicly available list here.
The business of banking
Starting with the basics (and an oversimplification, at that), banks are in the business of borrowing short and lending long.
Generally speaking, banks take deposits and lend out for credit lines, mortgages, and similar “longer duration” assets that make them money above what they pay in interest for their deposits. Deposits are liabilities — as in, the bank needs to pay them back — and because deposits are short-duration, they can be demanded back at pretty much any time.
This ability to lend out money long while borrowing short is why banks play a critical role in credit and money creation. The exact details are too long for this specific post, but suffice it to say, it’s an important function with many positive societal and economic externalities.
Bank runs are a death sentence
Every bank is also going to fail if all depositors demand their money bank at once. This is a bank run.
Bank runs used to be much more common, especially in the United States where there are typically smaller, regional banks as opposed to the large universal banks that Europe and Asia generally have. This changed to some degree after 2008, but history still means we have a lot of small regional banks — like SVB.
Still, the truth remains that a bank run alongside financial panic can stop the heartbeat of even the largest banks. In fact, in the early 1900s, these two factors were incredibly common. As a result, the FDIC was created in 1933 during the Great Depression in order to restore bank confidence.
But a bank’s organs can be harvested
Obviously, the ongoing financial shock of the Great Depression caused a lot of bank failures, and a lot of normal people lost money. The panic it caused had people stuffing their cash under their mattresses.
When the FDIC was established, its goal was to protect small depositors ($2.5k back then compared to $250k now), but also ensure that the financial system avoided the moral hazard of the government always bailing out banks. Banks still needed to be careful, or else they would pocket profits from excess risk and socialize losses by having government backstops. Small depositors are not looking at this every day, but similar to the SEC’s “accredited investor” label (which really is just about having money, mostly), those with more money are assumed to be sophisticated and thus should monitor and bear risk.
Over the years, the FDIC has been revised and improved, but the overall process is this:
- A bank fails
- The FDIC takes it over (which is what happened with the creation of the Deposit Insurance National Bank of Santa Clara)
- Another larger bank typically takes over the assets (loans, etc.) and liabilities (deposits)
And that’s precisely what’s happening with SVB.
Why did SVB experience a bank run?
I know the public accounts, but I’m not really going to speculate too deeply given I’m sure the facts will change. What is clear, however, is that SVB lost a lot of money. This loss depleted its equity, causing its effective leverage (that is, how much more it owes than it has on hand) to increase much, much higher.
SVB was planning on raising money from public markets; everyone saw what happened, and, as happens with all bank runs, confidence in the bank was hit, everyone started pulling their money out, and failure became inevitable. Whether or not SVB was actually solvent (meaning if they actually had equity left), they quickly depleted everything from everyone pulling their money out.
Was it bad investments in mortgage-backed securities in a rising interest rate environment? Sure, that would be part of it, but I expect some other financial institution would have loaned money if the book was easy to read and fundamentally sound.
My guess is there’s still worry about further losses that buyers will need to assess and price down.
Inevitably, even without knowing precise details, the sequence of events is almost certain: SVB tried to get a credit line from a larger bank to tide over the bank run but failed, especially with uncertain levels of losses. Then they tried to sell to a large bank which failed for the same reason. Finally, after a long night of late-night conference calls, they had to call it, and the FDIC put it in receivership.
Leverage always works against it. It decreases the amount you make going up, and exponentially magnifies the amount you lose going down. Once SVB’s equity dwindled down that much, it was always extremely vulnerable to being blown over. This is a common story. Sure, the speed of collapse was fast but it was not exceptional in the history of bank runs.
Pretty much, the takeaway is this: a well-loved (in startup circles) specialist bank failed, but this is far from unheard of in the history of banks (especially in the U.S.), and fairly typical.
So what now?
If you have less than $250k, the FDIC will be enabling access to your accounts very quickly, as per their bulletin.
If you have more… well, that depends on what buyer the FDIC finds, and how much they’re willing to take on. Remember, deposits are liabilities. If the assets are seen as too badly damaged, part of the negotiation may be for a buyer to assume some liabilities, but not all of them.
Nonetheless, most modern bank takeovers have covered all deposits, and there are very, very large banking entities (again, thanks to consolidation, especially post-GFC) that exist today relative to any other time in U.S. history. It may be a week or a few weeks — especially if it takes a long time to sort through SVB’s assets — but access should be restored.
In the meantime, if you’re a startup, call in, ensure that you have enough cash to run for the short term, and go from there.
And if you’re a VC — especially if you’re a large one — you definitely should have known better. You’re a financial manager that takes risks, and this is part of the business. Fortunately, if you’re a smaller VC, you’re extremely unlikely to take a haircut anyway (but again, peruse that failed bank list).
As for instructions, do refer to the FDIC official bulletin.
