George Bailey
Let me see if I can get this right. So Silicon Valley Bank, known for investing “venture capital” for cutting edge industries, was closed by the Federal Deposit Insurance Corporation. The FDIC stepped in, because the Bank didn’t have enough money to cover its deposits, just like the “bad old days” of the Great Depression. Depositors went to the bank, and their money wasn’t there. It’s just like Jimmy Stewart in “It’s a Wonderful Life”, when everyone showed up at the Bailey Bank to take out their money.
Except, instead of folks lining up at the door, in 2023 they just hit the screen on their phones. They move the money with lightning speed, no waiting in line, and in almost no time, the SVB bank was “empty”.
So that’s sucks for them, right?
Make Money on Money
Banks make money. They do it by investing the money of their depositors. One way to do that is to loan that money out to others (venture capital, mortgages, car loans), and another is by investing in “safe” securities, like US government bonds. And Government bonds are incredibly safe. But SVB put so much money in bonds, that when interest rates went up, and money go “tighter”, all of a sudden SVB was “short”. They didn’t have the cash on hand to cover deposits.
Remember that interest rates went up because the Federal Reserve itself was raising the rates, in order to slow inflation. I think all of us knew that was going on, and it’s hard to understand how a “cutting edge” bank would miss this. Actually, I’m sure that the fine investment minds at SVB knew what was going on, but they thought they could “ride out” their cash short fall. They would go out and raise more capital for the bank, kind of like when George Bailey’s family got everyone in town to pitch in money around the Christmas tree.
But the depositors found out, and started to get their money out. And in this age of Twitter, the word went out fast, and soon the bank was caught, and the grim FDIC inspectors showed up, and padlocked the doors.
FDIC
The depositors in Silicon Valley Bank are protected by the FDIC, up to $250,000. And yesterday the FDIC was already paying out to those depositors, their money no longer in the SVB. But the problem is, there are many corporate depositors, who kept their “liquid assets” for things like payroll, in the bank. And those assets were much greater than $250,000.
Of course businesses keep their money in the bank, just like you and I do. And if it’s a big enough business, one month’s payroll might be in the millions of dollars. All of a sudden, those companies can’t meet their payroll obligations – the money ain’t in the bank. The FDIC promises that they too will get their funds ultimately, but it wasn’t yesterday and it’s not likely to be tomorrow either. Hard to accept the word from your boss, “There won’t be a paycheck this week, but come to work anyway”.
Shares of Nothing
And then there’s one more set of “monies” tied up in the Silicon Valley Bank. Most banks are publicly held companies; they sell shares of “stock” on the market. While the FDIC insures the deposits, there is no insurance for owning shares of stock. So all of those investors in this “cutting edge” bank are likely to lose their money, just like many did in the stock market crash of 2008, and the “dot.com” crash of 1995 (I remember well when my $4000 of Worldcom shares ended up worth about $0.45 – total).
So woe-for-those Silicon Valley Bank owners. Their shares in ownership are literally valueless. And it’s not just individuals. The Ohio Teachers Retirement System, my pension fund, owned $40 million worth of SVB stock. There’s some “fine investment minds” in Columbus, Ohio too. I guess in their favor, they lost over $5 billion last year on $95 billion in investments, so $40 million is just another drop in the 2023 bucket.
Silicon Valley Bank screwed up. This doesn’t mean that we are headed to another Great Depression, with runs on all the banks. Don’t start lining up at the Park National ATM machine, and don’t start storing that inflation/vulnerable cash under your mattress. Most banks (well, not New York’s Signature Bank) are safe. And the FDIC is well funded to protect deposits, as long as, the BIG-BIG-BIG banks don’t fail. And don’t worry about that: those banks are why the term “Too big to fail” began.
Top Ten Banks in the United States
- JP Morgan Chase
- Bank of America
- Citigroup
- Wells Fargo
- US Bancorp
- PNC Financial
- Truist Financial (BB&T and Sun Banks)
- Goldman Sachs
- Capital One Financial
- TD Group US Holdings (Toronto-Dominion Bank)
Note – Silicon Valley Bank was ranked 15th, Signature 29th. My bank Park National is ranked 136th out of 2124 total banks (Fed Reserve).
