Los Angeles Times

This bank run follows a familiar formula

SVB’s short-term depositors pulled funds tied up in long-term assets, fueling a cash crisis

- MICHAEL HILTZIK Hiltzik writes a blog on latimes.com. Follow him on Facebook or on Twitter @hiltzikm or email michael.hiltzik @latimes.com.

All banking crises throughout history have shared a common element: Short-term depositors try to withdraw their money from institutio­ns locked into long-term assets.

When all the depositors try to get out at the same time, the result is an oldfashion­ed run on the bank. The bank either can dredge up the money to pay them, in which case the crisis passes, or it can’t, in which case it fails.

These crises tend to take on the coloration of their contempora­ry landscapes. So say hello to Silicon Valley Bank.

This Santa Clara-based lender to Silicon Valley startups was closed Friday by the California Department of Financial Protection and Innovation, which turned it over to the Federal Deposit Insurance Corp. (FDIC) as receiver.

The FDIC says all insured depositors — that is, those with balances at the bank up to $250,000 — will have full access to their insured deposits no later than Monday.

Uninsured depositors will get an “advance dividend” within the next week, and a chit for their uninsured funds. The FDIC says they may ultimately receive more of their money back, but didn’t say how much or when. The agency also advised borrowers from the bank to keep making required payments on their loans.

The bank had reported in its latest annual report that 87.5% of its $173.1 billion in deposits were uninsured as of the end of 2022 — a signal of its rapid growth in the hypercharg­ed Silicon Valley economy of recent years.

The bank’s collapse has inspired a predictabl­e round of hand-wringing in the financial commentari­at. At one point Friday, soon after the announceme­nt from the California regulators and FDIC, a blurb at CNBC.com tied the bank collapse to Friday’s Dow Jones industrial average loss, the Dow’s fourth down day in a row.

Another headline asserted that “Silicon Valley Bank’s crisis is rattling America’s biggest banks.”

But that’s implausibl­e, to say the least. Almost certainly, the stock market’s decline Friday was due to the jobs report early in the morning, which showed more employment growth than was expected, consequent­ly raising the prospects for more hawkish interest rate increases from the Federal Reserve.

(Days 1, 2 and 3 of the stock market’s swoon followed testimony Tuesday from Fed Chair Jerome H. Powell indicating that he thought more rate increases were in the offing to quell inflation.)

As for the biggest banks, if they’re “rattled” it’s at a pretty low volume. Shares of JPMorgan Chase jumped 2.5%, Wells Fargo rose 0.6%, and Bank of America and Citigroup each fell less than 1% in Friday trading.

What happened at Silicon Valley Bank, then?

Based on the informatio­n that has been made public, the bank unwisely put its eggs in one basket by taking deposits from an insular group of depositors: venture-funded startups.

Some reports assert that the bank did business with nearly half of all venturebac­ked tech and healthcare companies in the U.S. The bank boasted of its role as “the financial partner of the innovation economy.”

It appears that the bank didn’t follow Mark Twain’s observatio­n, “The wise man saith, ‘Put all your eggs in the one basket and — WATCH THAT BASKET.’ ”

The bank wasn’t watching its basket. (Nor were depositors who placed personal or corporate funds well in excess of the FDIC coverage limit in accounts at the bank.)

The bank used its depositors’ funds to buy longdated Treasury securities and long-dated mortgageba­cked securities. Not only were those funds repayable on demand, however, the depositor base was homogeneou­s — and Silicon Valley entreprene­urs and investors tend to move in lockstep.

Bloomberg commentato­r Matt Levine properly calls this “boring maturity mismatches and a lack of deposit diversific­ation.”

Investing in Treasurys with distant maturity dates — anywhere from a year to 30 years out — is perfectly safe, since the U.S. has never defaulted. When the bonds mature, you can be 100% certain that you will receive your principal, plus the nominal interest.

In the interim, however, the value of those securities, and of mortgage-backed paper, falls as interest rates rise (and rises as interest rates fall). If you have to sell too early, you can take a bath. That’s the fundamenta­l Silicon Valley Bank story.

The vast majority of the bank’s depositors were startups born in the nearzero-interest-rate environmen­t of the last decade or so. That’s the period in which the bank bought bonds.

The bank seemed destined for almost unlimited growth — as its assets soared to more than $200 billion it ranked as the 16th-largest bank in the country, albeit one almost unknown outside Silicon Valley. Its market capitaliza­tion reached $44 billion in October 2021.

At its last quoted price Thursday on Nasdaq its market value was less than $6.3 billion, and by Friday was effectivel­y zero.

But in terms of the banking sector as a whole, it was still small potatoes. JPMorgan’s assets at the close of 2022 were about $3.7 trillion, and its market capitaliza­tion is $388 billion.

Starting in early 2020, the Fed put interest rates on an upward trajectory, raising rates by 4.75 percentage points in 2022 alone.

This rattled the bank’s depositors, who started withdrawin­g cash. Their interest-related expenses were rising and their options for raising new rounds of funding were shrinking, as the venture firms that had been keeping them afloat slowed down their investing.

On Thursday, as the bank announced that it was seeking new capital, venture capitalist­s such as Peter Thiel advised their portfolio companies to pull their money out, intensifyi­ng the rush for the exits.

According to a filing by California officials, depositors initiated an astounding $42 billion in withdrawal­s on Thursday. By the end of the day, the bank’s cash balance was nearly $1 billion in the hole.

Silicon Valley Bank took a loss of about $1.8 billion on a sale of $21 billion of longdated securities completed on Wednesday, the bank said. It also owned about $91 billion in securities it was planning to hold to maturity.

On Wednesday, the bank said it was seeking $2.25 billion in new capital through a stock offering. The offering reportedly failed, prompting the government-ordered shutdown.

The bottom line is that the bank’s story is an old one. Only the glitzy trappings are new.

Is this a harbinger of a broader slowdown in the economy?

Probably only if you think the “innovation economy” is the whole economy, which was always questionab­le and more untrue today than ever.

 ?? Jeff Chiu Associated Press ?? POLICE OFFICERS exit Silicon Valley Bank in Santa Clara on Friday. The FDIC says insured depositors will have access to their deposits no later than Monday.
Jeff Chiu Associated Press POLICE OFFICERS exit Silicon Valley Bank in Santa Clara on Friday. The FDIC says insured depositors will have access to their deposits no later than Monday.
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