The collapse of Silicon Valley Bank (SVB) on March 10, 2023 was a major shock to the financial world. SVB was the largest bank failure in the United States since the 2008 financial crisis, and its failure had far-reaching consequences for the tech industry and beyond. SVB suffered what is known as a “run on the bank” or “bank run.” A run on the bank is a situation in which a large number of depositors withdraw their money from a bank, usually because they fear that the bank will fail. This can cause the bank to run out of cash and collapse.
Bank runs are often caused by rumors or news that the bank is in financial trouble. If enough depositors believe this, they may withdraw their money, even if the bank is actually solvent. This can create a self-fulfilling prophecy, as the bank’s financial situation will deteriorate if it loses a large amount of cash.
Bank runs can have a devastating impact on the financial system. They can lead to the collapse of banks, which can cause widespread financial losses. They can also lead to a loss of confidence in the banking system, which can make it difficult for businesses and individuals to get loans and for an economy to function.
I want to explore the causes of SVB’s collapse and the lessons that can be learned.
The Collapse
It is important to appreciate the indirect role that government policy played in this story. Certainly the government was not trying to cause bank failures when implementing economic policies, but it is often the unknown and unintended consequences that have outsized impacts for an economy and in life generally.
In response to the COVID-19 pandemic, the government implemented swift and powerful policy measures in an attempt to save a stalled economy. More recently, inflationary pressures have caused the Federal Reserve to pursue a historically aggressive tightening policy cycle. Price stability (i.e. managing inflation) is part of the Fed’s dual mandate and controlling interest rates is a key tool that the Fed has to achieve their mandate. Tighter monetary conditions should lower inflation, however, the Federal Reserve’s relatively blunt toolkit often creates unintended consequences within the financial system and broader economy.
When a bank accepts deposits from customers it has 3 choices: 1) leave the money to gather dust 2) purchase investment assets 3) make loans to other borrowers – thus creating a new asset on its books. SVB loaded up on US treasury bond holdings in recent years as cash from depositors increased. Typically a portfolio of treasury bonds are considered to be safe investments. However, the sharp increase in interest rates caused the value of previously issued treasury bonds to fall sharply. This makes sense, afterall, why would I want to hold a treasury bond paying 1.75% if I could buy one today that pays nearly 4%? As withdrawals increased, SVB was forced to sell its treasury bonds at a significant loss. If depositors never would have demanded their cash back, then SVB wouldn’t have had to realize the losses and we might still have a Silicon Valley Bank!
Social media also contributed to the collapse of SVB in a number of ways. First, a tweet from a prominent entrepreneur, Kim Dotcom, that was viewed by 2.4 million people and retweeted nearly 3,500 times, warned customers to pull their money out of SVB, causing a run on the bank. Bank runs have been a part of America’s financial history for a long time. While the imagery may change from old photos of crowds wrapped around a local bank to people furiously tapping on their smartphones, the fear and panic that encapsulates humans is the same
There were a number of other factors that contributed to SVB’s collapse that I won’t get into in this article.
Impact on the Tech Industry
The collapse of SVB had a significant impact on the tech industry. The bank was a major lender to many tech companies, and its failure left many of these companies in financial distress. In addition, the collapse of SVB raised fears about the stability of the financial system, which could lead to a slowdown in lending. Many people in the tech industry had seen SVB as a safe and reliable bank, and its collapse shattered this confidence.
Lessons
The collapse of SVB reminds us that the financial system is deeply interconnected. When one bank fails, it can have a ripple effect on other banks and institutions. The decision to ensure deposits beyond the standard FDIC limit was a welcome relief to despositers, and sparked concerns over moral hazard with some politicians and policy makers. Again, it is often the unknown and unintended consequences that have the biggest impact simply because they are unknown and unintended. This story reminds me about the importance of accepting that we have no idea what tomorrow will bring and so flexibility and adaptability are crucial in personal finance. We should all make sure that our personal balance sheet can meet life’s own “bank runs” that can hit us when we least expect it. A good first step? Maintain a strong personal cash position in an FDIC insured, interest bearing account, so that you won’t be forced to sell assets before their intended sale date.
What I love the most about personal finance is that it’s personal. I would love to hear your thoughts, questions, or financial topics that you would like to hear more about. Please send them to commoncents@Northbrookfinancial.com.
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