And how will this affect startups and the financial system?
Why do startups use SVB? This is according to a friend whose startup has their money at SVB and are currently extremely worried:
Their VCs tell them to. Don't forget that most founders have no idea what they are doing when it comes to this. Have you ever had someone wire you $20 million? The whole point of VCs is to help with this kind of thing. Every single Marc Andreessen startup uses it, for instance.
Better rates and packages than other banks would offer a revenue less business account. I've heard stories about how founders can't even get a credit card from other banks.
They offer incentives like 1 year of free AWS credit. Startup packages on SFDC. Stuff like that.
My understanding is that most startups keep some operational cash at a bigger bank like Chase, to handle international payments and payroll. But keep the bulk of their funding at SVB. So they're not necessarily worried about liquidity on Monday but more like what happens in two or three weeks.
In retrospect it is obviously dumb to keep way too much money above the FDIC limit at a single bank. (Though, having been a startup founder, I'm not sure I'd be super happy to have to also take on the burden of managing a T-bill portfolio when I'm also trying to hire, market, find product fit, blah, blah, blah.) But I blame the VCs who are supposed to be smart for giving bad advice to founders who don't know any better.
The true sign of intelligence is being able to explain complex topics in the simplest way possible. Great post 🙌
There is another reason some startups — particularly those in the crypto space — chose SVB: it was literally the only bank that would allow them to open an account. I know this first hand, though it has been a few years and perhaps the landscape had since changed.
I’ve been searching for a great write up about the situation with SVB all day, and this was by far the best, most comprehensive, and succinct explanation I’ve read so far. Thanks for putting the effort into it
So knowing someone who was at SVB, Lulu roughly got it correct. The dumb strategy of selling a lot of assets all at once while trying to raise capital combined with terrible comms strategy (if you were a bank trying to start a run on yourself, I don’t think you could have done better) spooked everyone in to a bank run. Blame the honchos at SVB.
SVB could have just slowly quietly sold assets over time to raise their capital buffer.
This might be a dumb question but where do you keep your money if you're Fully Mature Corp with $50 million in cash? Spread across multiple banks? Buy insurance?
Re Why SVB vs JP Morgan.
As a foreign founder I was told by multiple people that SVB is the only bank that is willing to setup an account for an “unproven” entity while big banks are just shun these kind of customers. Don’t know how true is this.
A good piece. So many factors at play. I think no one thing is dispositive for the death of a bank. You’re right about employees of boutique firms. I once volunteered to take a salary cut when money was scarce for my small-business employer. It turned out the accountant had embezzled a large sum. No matter: it was still the right thing to do. No regrets. Bitterness is like drinking poison and expecting someone else to die. The Big Banks on Wall Street, however, were felonious frauds. Too big too fail, in my opinion, is a good reason to break them up, sell off the good assets to responsible businesses, and let the investors take a haircut.
Outstanding job explaining this mess. One reason this bank was weird was its lack of diversification. All the eggs were in the startup basket.
I have taken the funds that were in the budget
and which you were probably saving for student loan relief
Forgive me they were necessary to bail out tech bros
so sweet and so cold
Nobody asks "where's my flying car" during a bank run.
SVB went after deposit growth in order to boost their stock price. Smarter banks turn down deposits or push clients toward money mkt funds or t-bills.
Big banks are subject to liquidity rules and must hold short-term t-bills against a good portion of deposits. SVB was exempt. They still could have bought short-term securities out of prudence, but in chasing depos to boost their stock price they also didn’t want to hurt their ROA and net interest margin numbers. So they bought 10-15 year maturities….against short term deposits…..at record low interest rates. Reckless incompetence.
The MTM losses on SVB’s HTM bond portfolio, which they boosted from $10b to $90b over two years, exceeded their tangible equity capital. That is why there was a run- they were insolvent - that and balances in deposits being drawn down as tech firms burned money or sought higher yields in t-bills.
How could the Fed allow this? Technically it wasn’t illegal. Also, perhaps because the CEO was a friend and donor to Mark Warner of the Senate Banking Commitee? Echoes of SBF buying protection. Strange that Liz Warren hasn’t yet condemned SVB management, eh?
During the wave of bank failures in 2008-2009, the FDIC almost always had an acquiring bank in hand on the day they announced the shutdown, and the shutdowns occurred before the total failure/collapse of those banks. When the FDIC saw a bank on a trajectory to failure, with potential FDIC deposit losses mounting, they would step in. During the days leading up to the announcement, the FDIC would quietly solicit bids and choose the best one. This is a different situation, it seems, with such a huge percentage of huge, uninsured deposits. Perhaps some white knight will come in to save the day, but is that likely? (I don't know.) We do know that SVB itself was trying to find a buyer and was unable to do so. Does the FDIC have some kind of power to force a bank or banks to take on this hot mess to serve the greater good? I guess we'll find out.
I’m really interested what the knock on effects will be for adjacent banks; First Republic is also popular with startups (though much less singularly focused than SBV) and received a rumored 6B in deposits on Thursday night from startups fleeing SVB. Today (Friday), there were massive withdrawals from FRB to even bigger safer banks like JPM. I don’t think banks like FRB are at high risk of failing, but certainly these wild swings of capital flows have to be causing some goofy effects
This is a nice encapsulation of what happened. However, more should have been written about the peculiarities of bank financial stability. Anat Admanti's "The Bankers' New Clothes: What's Wrong wit Banning and What to Do about It" goes into great detail on why most banks are technically insolvent. Even with Dodd- Frank, banks are not capitalized to the extent they should be. Fast rising interest rates put balance sheets in jeopardy if government bond holdings are a significant part of the portfolio. This was the case mwith SVB and the was no way they could go out and recapitalization things by a stock issuance.
I hope this is just a one off but suspect that there are more banks in precarious shape.
This is ridiculous. Why is it ok for banks to gamble with deposits while giving depositors low interest?
Oh yeah, deregulation.
"In 2018 banks under $700 billion of assets succeeded in lobbying Trump and a Republican Congress to get out from bank rules, like needing to have enough cash on hand to pay back depositors easily, known as a liquidity requirement. The Fed then implemented those rules in a bank-friendly way, contra the wishes of then-Vice Chair Lael Brainard, who warned of potential bank problems like SVB in 2019. That’s likely one reason SVB got into trouble, because it used its political power to eliminate the regulations that would have forced it to have enough cash on hand to stop a bank run. (SVB CEO Greg Becker sold his bank stock just before the collapse, so the sleaziness hasn’t stopped.)"