“Survival of the fittest” is a bit misleading. Because for humans, “fitness” has more to do with adaptability of behavior more so than agility of your physicality. If we don’t adapt, we will fail. And humans are evolving at a rapid clip.
My parents’ generation wasn’t doing this at this rate. Once the internet hit the scene, we hit a speed of advancement the likes of which my parents would have never imagined, much less adapted to.
We can’t save people from themselves. We especially cannot do this from a centrally planned approach.
One month ago, Forbes called Silicon Valley Bank (SVB) one of “America’s Best Banks”.
One month is all it took to go from riches to rags.
So what happened? It was a bank that thought it could get away with old banking under new banking dynamics. It’s also a lesson in what happens when you don’t temper your desire for profitability with economic reality.
People like Elizabeth Warren love to say high prices are due to greedy corporations who care only for large profits. And while the corporations do care a great deal for their bottom line profitability, they also understand that it has to be sustainable, not just immediate.
Walmart and Kroger rely on people coming back each day or week, not just one and done transactions. The latter is short-sighted. And that’s exactly what Silicon Valley Bank was: short-sighted.
What happened to Silicon Valley Bank is an indictment on the fractional reserve banking system… or rather an indication that the current proportions of fractional reserve banking is untenable under these evolving banking conditions.
The issue was liquidity. But they also set themselves up for it, which is strange.
Technologically speaking, I don’t need to line up at the bank to withdraw cash anymore. I can just transfer funds digitally through my phone. Oh, I need to pay this bill, boop-boop-boop, done. Money sent.
I don’t even write checks.
Banks should have a heightened awareness of this reality: people can drain their accounts with the click of a button. Which means banks need to make sure people are keeping their money in the bank, by incentivizing them to do so.
Low interest rates incentivized people to borrow money. High interest rates then, would theoretically incentivize people to save money, or at the very least avoid borrowing. So if you can’t save a surplus, then you aren’t borrowing either if you can avoid it because it’s too expensive to do so.
So what happened?
Interest rates went up, that’s an observable fact. Yet there was a run on the bank.
They didn’t raise the interest rates they paid out to their account holders commensurate to the rise in overall interest rates. They raised the rates to borrow, but not the rates to save. They kept it at some paltry level like 0.5% or something which apparently was still higher than their near competitors.
Once you find out that you can make more money in a Money Market account at 4%, why on earth would you keep a bunch of money in a bank account yielding 0.5%? You don’t need a finance degree to know what’s what here.
Well, once you realize you’re 10X better off-putting your money into Treasury Bills or Money Market accounts, you naturally transfer the funds over. That is, you withdraw your money from the bank, and place your money into the Money Market account.
But the bank had to liquidate Treasuries they bought at 1% so its account holders could go buy them at 4%. To be fair, every bank is required to carry a certain level of Treasury bonds. So it wasn’t like that was their choice or fault, per se.
If you’re a business, especially if you are a tech business, and you see interest rates going up, you’re not borrowing if you can just withdraw from the account. Or you aren’t borrowing as much, and offsetting with your bank accounts.
That makes sense. If your business is already squeezed by economic conditions, you’re not looking for expensive money. You’re looking for cheap money. And the money you already have is cheaper than a loan.
If enough people do that, at once, you have a problem. It didn’t help that Peter Thiel was telling his foundation’s start-ups to withdraw from Silicon Valley Bank. Nor did it help that Elizabeth Warren was dancing on the grave of Silvergate.
If your portfolio of investments was only in pharmaceutical, and a major class action suit sweeps that industry, your stocks will take a hit along with them.
These banks were heavily invested in crypto and venture capital start-ups. Which was great during the pandemic when people were losing their jobs and starting their own businesses, and when people were taking their stimmy checks and investing in crypto.
We were bored and hopeless as a society and economy. We were baking bread and freaking out.
Prior to the Silicon Valley Bank collapse, the tech industry was squeezed into layoffs with stock prices precipitously falling. All this was a confluence of economic issues, poor management, and weak agility to adapt to the changes post-pandemic. The fallout for which is that many other dot-com businesses were caught in the crosshairs such as Etsy, Roblox, Roku, and Lemonade.
Before everyone starts clamoring for more banking regulations, it’s important to question why the existing regulations were insufficient. Unironically, Forbes also rolled out an interesting list of ten questions about this whole ordeal including these three:
Why did the FDIC not take proactive measures at the end of Q4 in 2022, when the SVB’s Common Equity Tier 1, a measure of the bank’s capital strength, was virtually wiped out when adjusted for unrealized losses of its securities portfolio? The unrealized losses from its Hold to Maturity banking book stood at $17 bn.
Why did the FDIC allow SVB to park $91 bn of its deposits in long-dated securities (mortgage bonds and treasuries) without commensurate asset liability management measures (apparently, there was no use (at scale) of interest rate derivatives to reduce the duration exposure along with appropriate convexity management, especially embedded within mortgage-backed securities?
Why did the FDIC not intervene at the end of 2021 when SVB disclosed that 96% of their deposits were not covered by FDIC insurance (most were more than $250,000)? Such high reliance on corporate/V.C. funding, with Ripple alone having deposits of up to $3.3 billion, is genuinely uncommon.
Which begs the question: why did Forbes make Silicon Valley Bank one of America’s Best Banks in 2023, knowing these things about it?
Regardless, knowing why a bank fails is important. If the underlying cause is systemic or just poor management, people need to know, and there needs to be transparency into how the government handled (or mishandled) the situation leading up to it.
Be careful out there!
