On Friday, the nation’s 16th largest bank, Silicon Valley Bank (SVB), was taken over by regulators. This came as quite a surprise – on Wednesday, SVB was a well-capitalized and established financial institution that had survived the dot-com bust.
On Thursday, the bank announced plans to raise additional capital.
On Friday, the bank was out of business. As Wolf Richter notes:
The fact that the FDIC took over the bank during the day – rather than Friday evening, which is the normal procedure – shows just how fast-moving and chaotic this situation, including a massive run on the bank, had become.
The Federal Deposit Insurance Corporation (FDIC) insures all accounts up to $250,000. That’s meant to protect everyday families from being ruined by bank failures. But 85% of SVB’s accounts exceeded this limit and were uninsured.
That’s bad news for the account-holders (mostly tech startup companies and venture capitalists). And it’s worse news for the rest of the financial sector.
For example, on Sunday March 12, regulators also took over New York’s Signature Bank – which suffered from massive deposit outflows in the wake of SVB’s collapse.
Here’s what went wrong, and what’s likely to happen next…
The other side of a speculative bubble
During the “Everything Bubble” over the last few years, SVB received massive deposits from start-up companies. Venture capital funds were competing to offer loans to zero-profit startups at the best terms. During the boom times, credit was easy to get. Money was everywhere, and a lot of it ended up in SVB.
Then the Federal Reserve started raising interest rates. Venture capital dried up. Zero-profit startup companies started drawing down their deposits at SVB to run their businesses.
Here’s the problem: in order to comply with banking regulations, SVB had invested customer funds in Treasury bonds. But now that the Fed had raised interest rates, the bank’s assets just weren’t worth as much as they’d paid for them. (Just last year, a 1-year Treasury bond paid 1.19% interest – today, a newly-issued Treasury pays around 5%.) When depositors wanted their money, SVB had to sell assets at a loss.
If more people withdrew cash, and SVB had to sell more assets at a loss, they’d quickly become insolvent. (Bloomberg’s Matt Levine has been covering this story in detail over the last few days, and provides a lot more detail into the particulars.)
A few smart people realized this, and venture capital funds were burning up the phones last week, begging their portfolio companies to clean out their SVB accounts while they still could (this is crucial considering most corporate accounts are much larger than the FDIC’s $250,000 insurance would cover). A lot of them tried – some of them (but not all) succeeded before regulators appeared at SVB’s headquarters and shut everything down.
SVB’s business model worked – until its depositors wanted their money! Then it failed.
SVB was the biggest bank run in U.S. history to date. It’s way ahead of #2, the 2008 Washington Mutual bank run. For comparison:
#1: SVB: $42 billion withdrawn over 48 hours
#2: WaMu: $16.7 billion withdrawn over 10 days
#3: Signature Bank, $10 billion withdrawn in one day
The run on #3, Signature Bank, started on Friday March 10. By Sunday March 12, regulators had shut down Signature Bank as well.
Why did the run on Signature Bank begin? For one reason: because SVB failed. Signature Bank just looked too similar to SVB – and that made people nervous.
This is called contagion, and it’s a very simple crisis of confidence. (For example, I’ve received dozens of calls and texts from friends and family asking whether their banks are likely to fail, and whether they should withdraw their money.)
The banking system works so long as we pretend it works. It’s based on faith.
The moment we begin to question it, it falls apart. I think this highlights the fragility of our financial system very clearly.
Today I encourage you to ask yourself these a question:
Is faith a sound basis for a financial system?
For me, faith just isn’t enough. I prefer to know with absolute certainty that my money is secure, especially my retirement savings. If you feel the same way, perhaps it’s time to learn whether physical precious metals are a good choice for you, too.
If nothing else, diversifying with physical precious metals can help you sleep soundly at night, regardless of which bank fails next.
Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver. Based in the Los Angeles area, the company has been in business since 2003. It has an A+ Rating with the BBB and hundreds of satisfied customer reviews.
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