OPINION:
The Silicon Valley Bank debacle should not be a siren call for more bank regulation.
Instead, Congress should recognize that most people put money in the bank for safekeeping — not risk-taking investment — and lift the $250,000 cap on deposit insurance. We also need more nimble credit facilities for banks and competent bank examiners.
Since 17th-century London, when goldsmiths started taking deposits of gold and sovereign coins and making loans by issuing transferable notes, banks have provided a physically safer alternative to stashing cash under the mattress and in company vaults.
Silicon Valley Bank, or SVB, didn’t make lousy investments. Like all banks, it borrowed short by promising to redeem deposits on demand and invested long by financing businesses and mortgages and purchasing reasonably safe securities.
That’s a risky but necessary proposition because if depositors get nervous about a bank — for good reason or bad — and too many quickly withdraw funds, it can’t retire loans and sell securities quickly enough. Then it fails.
SVB catered to the needs of startup companies, their employees and founders with good, fast service and products tailored to their needs. Reflecting the community’s values, it financed affordable housing, minority businesses and green energy projects.
These were not incompetent bankers — they had a solid loan book because they knew their community — that they could lend to and trust. Witness the considerable interest in purchasing SVB’s loan book by Apollo, Blackstone and others in the wake of the bank’s collapse.
Startups with good ideas and competent leadership attract a lot more funds than they immediately need and deposit considerable sums at banks. They don’t borrow a lot relative to those deposits, so SVB invested more than half its funds in rock-solid Treasury and government agency bonds.
During the tech boom of 2020 and 2021, interest rates were low, and deposits rushed into the bank, but too many of those funds were invested in long-dated securities. After inflation accelerated and the Federal Reserve raised interest rates in 2022, the value of those bonds in the resale market — not their value at maturity — fell.
As stock prices fell in 2022, venture capital got scarcer, and startups withdrew deposits to meet payrolls and other expenses — and perhaps earn higher interest rates in money market funds and similarly short-term investments.
Deposits fell last year, but the situation was manageable. In the first few months of this year, withdrawals accelerated, and SVB had to sell too many of its Treasury and agency securities in the resale market at a loss.
On March 8, Silicon Valley Bank announced a new stock offering to raise cash, but on March 9, banks had their worst day in equity markets in almost three years. SVB lost 60% of its value.
Peter Thiel’s Founders Fund and other venture capital funds advised their portfolio companies — the startups — to move their money, and the run on the bank became a torrent. It’s hardly surprising, because 94% of SVB’s deposits exceeded the $250,000 cap.
On March 9, SVB experienced $42 billion in attempted withdrawals of its $178 billion total deposits. It tried to raise cash from the Federal Home Loan Banks against good assets, but the latter needs to raise funds to accommodate requests, which means it can respond only when markets are open.
SVB’s request came too late in the day. It couldn’t raise cash, and it failed.
What was lacking was a Federal Reserve facility to lend against SVB’s good Treasury and agency securities at face value. After all, those will be worth their full amount on redemption.
Closing the barn door after the cow had escaped, the Treasury Department subsequently announced that deposits above $250,000 at SVB and Signature Bank, which had also failed, would be honored by the Federal Deposit Insurance Corp. The Federal Reserve established a one-year lending facility against Treasury and agency securities.
What’s needed is to remove the ceiling on deposit insurance for all banks and a Fed lending facility against the face value of good securities renewable for more than one year.
This wouldn’t create a moral hazard. Placing the burden of examining bank balance sheets on households and businesses is unrealistic and imprudent.
Grandma, at age 65 with perhaps $2 million in retirement savings, should not have to check bank balance sheets to safely deposit $500,000. And where should a restaurant chain or GM put their payroll accounts — in hundreds of banks to get the necessary insurance coverage?
Federal deposit insurance is risk-based. The FDIC sets premiums according to the quality of assets on banks’ balance sheets.
We need more competent bank examiners — any fool could see that SVB was overloaded with long-dated Treasuries.
The SVB management should have been replaced, but letting the bank fail was a tragedy. It made good loans based on its knowledge of the startup community. First Citizens Bank, anchored in the Southeast, will acquire SVB’s banking functions and face considerable challenges replicating that service.
• Peter Morici is an economist and emeritus business professor at the University of Maryland and a national columnist.
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