So, the California Department of Financial Protection and Innovation Shut Down Silicon Valley Bank (SVB) Friday and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. Silicon Valley Bank was a $200 billion bank with total deposits of over $170 billion.
It is the largest US Bank failure since Washington Mutual Bank in 2008 who owned most of the land sold to JP Morgan Chase After it was taken over by the FDIC.
The FDIC said in its SVB press release that depositors will have full access to their insured funds as of Monday morning – the insured amount is the first $250,000 in the depositor’s account. Everything over $250,000 will become available to customers as the bank’s assets are sold to other banks and financial institutions.
In case you’re thinking: “Wait a second, SVB was a $200 billion bank. It certainly has relatively large companies as depositors that have more than $250,000 in deposits,” so I applaud you because, yes, they do.
Of course they do.
There’s a lot to unpack here and the full story is far from even the beginning, but there’s one important thing going into the weekend that we should think about and articulate clearly.
Who is to blame here?
Read more: A Tale of Two Banks: Why Silvergate and Silicon Valley Bank Collapse
I have fingers to point, so where do I point them?
right off the bat, who’s here No Blame: Depositors.
you will no doubt read the tips SVB failed because it was the bank of choice As for VC-backed Silicon Valley technology businesses, many of which are questionably capitalized and woefully unprofitable (you know, the company that’s the “Uber for your Salesforce” or whatever).
Yes, SVB was tech-forward and not necessarily “crypto-friendly”, it banked crypto hedge funds and VCs like Blockchain Capital, Castle Island Ventures, Dragonfly and Pantera (oh, and even CoinDesk). None of these businesses caused SVB to fail. While it is understandable to criticize the concentration of depositors in most cases, it does not apply here.
If you want to point to VCs, perhaps point to the Founders Fund, set up by Peter Thiel, which has helped companies “”Money pull amid concerns about SVB’s financial stability,
In doing so, it managed to create fear among investors and a good old fashioned bank runAs did the mediocre Mr. Potter in Bailey Buildings and Loans”it’s a Wonderful Life,
Sure, SVB Bank only ran because depositors asked for their money back, but I hesitate to point the finger at the depositors. After all, he didn’t have a passionate George Bailey (played by the absolute everyman Jimmy Stewart) prompting him to reconsider for the good of his fellow investors.
Of course, Founders Fund isn’t exactly Old Man Potter. It didn’t wake up and decide it wanted to tank SVB (and the idea that VCs intentionally tanked SVB to encourage the use of fintech companies is a bit far-fetched, even to me). Founders Fund was worried about something. what were you worried about SVB’s failed capital raiseWhich somehow only happened in the last 36 hours.
SVB was running into some issues with its liquidity. If it doesn’t make sense to you, here it is in a nutshell: customers deposit money into the SVB, the SVB takes that money and invests it in Treasuries, the value of those Treasuries changes based on market conditions , Treasury SVBs purchased were long-dated so they were declining. The decline in value is uncertain for the financial position of the SVBs.
,You can read a longer explanation from Matt Levine of Bloomberg.,
From that crude explanation you should have a go: SVB bought Treasuries that lost value as the US Federal Reserve raised interest rates. This would normally be fine and dandy until a bunch of depositors wanted their money back at the same time.
As we mentioned above, that is what happened.
As you head into the weekend, know that smart people, or those who know the jargon or read this column, will call SVB’s experience with the falling value of their treasure “term risk,
Point them at the SVB and the Federal Reserve. seriously.
If you hesitate to point fingers at depositors or VCs who instigated bank runs, I don’t blame you. You can look at the SVB and the Fed instead.
First and foremost, there was the mismanagement of risk by SVB, which very clearly bought the wrong financial instruments with deposits. If it didn’t, it wouldn’t be raising capital.
But in defense of the SVB (a very weak defense to be sure) the Fed has raised interest rates by a factor of about 20 over a period of about a year. So while SVB made some bad bets, the responsibility for those bad bets must also sit with the Fed for raising interest rates so quickly.
How ironic: In trying to do something about high inflation, the Fed inadvertently started tanking the banks that invest heavily in Treasuries.
Finally, and I’ll repeat this to be as clear as possible, It’s not crypto’s fault.
It’s not crypto’s fault as the collapse of SVB doesn’t matter the mix of the bank’s depositors. The risk management decisions made by SVB with customer deposits were made without considering what the depositors were doing. This is not the fault of crypto just as it is not the fault of any other industry.
Except, of course, the banking industry.
The views and opinions expressed here are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.