SVB Collapse: Whose Fault Is It Anyway?

When something goes wrong, it is human nature to look for an entity to blame. Whether you blamed your sibling for hitting you on a long car ride growing up or you blame a current or former politician for policies that have negatively impacted your life. These are natural reactions to have. But just like both of these situations, there is more than meets the eye when it comes to finding out who is to blame for the Silicon Valley Bank collapse that occurred last week.

Who:

Silicon Valley Bank (SVB), a top-20 bank nationally with over $200 billion in assets, was the top bank in Silicon Valley catering to mostly tech startups in the region, including thousands of venture capital firms.

What:

Starting late last week, SVB experienced an old-school run on the bank. Think about what happened to Bailey Building & Loan in It’s a Wonderful Life. This then caused the already faulty foundation of the bank to give way and prevented SVB from being able to make their client’s whole when they looked to withdraw their entire account balances as of Friday.

When:

This all became public as of last Wednesday (3/8/23) after SVB sold securities they held at a loss and tried to sell over $2 billion in new company shares to secure its bottom line. As one might imagine, this caused their clientele to panic and withdraw their money from the bank, plummeting the stock price over 62% between Wednesday and Thursday. Then on Friday, regulators stopped the trading of SVB stock, shut the bank down, and had the Federal Deposit Insurance Corporation (FDIC) take over. The FDIC was created during the Great Depression to insure banks from default, currently up to $250,000 per client.

Why:

There are many thoughts around how SVB was allowed to get into this position, but the truth is that it was more or less a perfect storm of events that if any one of them didn’t happen, SVB would have likely been fine. 

A very common thought is: why weren’t regulations established after the 2008 financial crisis to ensure something like this wouldn’t happen again? The short answer is yes there were regulations established, known as the Dodd-Frank Act, in order to prevent this type of meltdown from a financial institution. However, as many Democrat politicians have pointed out, in 2018, Donald Trump signed bipartisan legislation that removed certain regulations from Dodd-Frank to fulfill his campaign promise of de-regulating the administrative state. One of the regulations that this bill cut was the stress/risk testing on banks with assets between $100 billion and $250 billion in assets, labeled midsize banks. For those of you paying attention, SVB falls conveniently between these bounds.

The Federal Reserve’s drastic interest rate hikes over the last 12+ months exposed one of SVB’s key weaknesses – its clients. Like most banks, SVB would keep small amounts of cash on hand for operations and daily transactions while loaning out the rest at higher rates and buying long-term debt such as Treasury bonds. Traditionally, this has been a way to make a steady profit and ensure your bank is financially sound. However, when the Fed began hiking interest rates the debt notes that SVB held began to plummet in value. On top of this, due to the skyrocketing interest rates, funding for startup companies became scarcer forcing those companies to pull large chunks of cash out from SVB. This forced SVB to sell their long-term debt positions at a loss. When these losses became public on Wednesday, much of their clientele panicked and began pulling their money out, making the situation even worse.

If any one of these dominos fell differently, SVB probably would not be in this position. That said, shortsighted, mismanagement of funds by the executives at SVB is, in my opinion, the largest reason for their failure, not interest rates and not Donald Trump. Those executives are the ones that should be held most accountable. Other banks have weathered the current economy just fine, simply ask Jamie Dimon of JP Morgan Chase whose stock is positive over the last 12 months.

What’s next?

The FDIC insures all client deposits up to $250,000. So when they take over, those bank account balances under $250,000 will quickly be able to withdraw their funds if they’d like. However, a good portion of SVB’s clients had balances over that amount as they were heavily funded tech startups. There is still an air of uncertainty around those larger account balances, but there are a few directions that seem likely at this time. The FDIC could sell off the remaining assets of SVB in order to pay back the uninsured account balances. A company could buy SVB and make its clients whole as part of that arrangement. However, one option that appears off the table, at least for now, is bailing out SVB with tax-payer funds, as President Biden strongly stated this morning that course of action was not an option. Although, if the FDIC, Treasury secretary, and Federal Reserve decide that allowing SVB to fail and all those startups to lose their funds presents a “systemic risk” to the United States’ economy, they could use the “systemic risk exception” via the FDIC to enable the government to pay back those SVB clients with over $250,000 account balances.

Personally, I very much hope that taxpayer dollars are not used to bail out Silicon Valley Bank clients, as it would just be another example of the Biden Administration colluding with the tech industry, and quite frankly our country has written enough checks that cannot be cashed. I also hope that those executives at SVB that mismanaged these funds so expertly are held accountable in some way. Finally, I don’t think more government regulation is needed in order to prevent this from happening again. Maybe allowing poorly run companies to fail (instead of bailing them out) would incentivize efficiency and a self-correcting marketplace moving forward. Whatever happened to actions having consequences?

If you have any questions or comments on this blog or any financial topic, I’d be happy to hear them. I can be reached at [email protected].