Sadly, Silicon Valley Bank (SVB, $SIVB), the 16th largest bank in America at the end of 2022, experienced a bank run. Now the contagion has spread to other regional banks such as First Republic Bank, Signature Bank, Zions Bancorp, PacWest, Comerica, and Charles Schwab. Even the largest banks were getting hit as well.
Ultimately, The Federal Deposit Insurance Corporation (FDIC) said on March 10, 2023, it would take over SVB and that its depositors with up to $250,000 will have access to their deposits no later than Monday morning, March 13, 2023. In the meantime, the FDIC will find a buyer so that depositors with over $250,000 will also be made whole.
The bank had $209 billion in assets and $175.4 billion in deposits. Roughly 87% of Silicon Valley Bank’s deposits were uninsured as of December 2022, according to its annual report.
Thankfully, the Federal government decided to protect all SVB depositors on Sunday, March 13. The Feds also shut down New York’s Signature Bank and guaranteed all its depositors to help stop the contagion.
But will it be enough for the regional banks? Doubts are high.
Why Did The SVB Bank Run Happen?
First, the bear market happened in 2022. As the stock market declined, so did SVB’s share price by 66%. Its clients couldn’t raise as much capital or keep depositing as much capital at SVB. SVB focuses on lending to technology companies, startups, biotech, venture capital, and private equity firms.
Second, the Fed aggressively raised interest rates. The higher interest rates went, the more expensive SVB’s cost of capital, which are its deposits. SVB had to pay higher interest rates to attract and retain deposits to stay competitive. In general, this is fine because banks can then lend out deposits at an even higher rate of return. This is called the Net Interest Margin, or NIM.
Third, in 2021, SVB supposedly invested about half of its deposits into 3-10-year Treasury bonds yielding 1.63% on average. SVB planned to hold them to maturity (HTM). Unfortunately, buying 3-10-year Treasury bonds in 2021 was close to the top of the market. After the Fed aggressively started raising rates, the value of its HTM portfolio tanked.
You would think holding Treasury bonds until maturity would be safe. And it is if you own all the money. However, SVB was reinvesting short-term customer deposits, which became increasingly costly as the deposit interest rates they had to pay rose to over 4%. In such a scenario, the bank is losing money (negative Net Interest Margin). SVB borrowed short and lent too long, painful when the yield curve inverts.
Then when SVB decided to raise $3 billion in equity to cover its shortfall, and couldn’t, the bank run accelerated.
A Bank Run Is A Crisis Of Confidence
Silicon Valley Bank’s clients began withdrawing money because they no longer felt confident their deposits would be accessible.
Imagine if you were a money-losing startup that just raised $20 million. Your cash runway is 18 months until you need to raise another round of financing. The risk of losing all your capital at SVB, through no fault of your own, is immense. Hence, the rational move would be to withdraw all your deposits and move them to a larger bank like Chase.
Unfortunately, there’s no upside in leaving your deposits at a bank that is experiencing a bank run. If the bank survives, it’s not like you’re going to get much better terms (high deposit rates, lower fees, etc). If the bank doesn’t survive, you risk losing everything.
Thankfully, the FDIC stepped in to ensure SVB’s depositors are made whole. Contagion is bad, especially given it negatively affects innocent parties.
Currently, thousands of startups are being negatively impacted because their money is stuck at SVB. They might not be able to pay vendors and make the next payroll.
Even The Best Capitalized Banks Are At Risk Of A Bank Run
The tier 1 capital ratio measures a bank’s core equity capital against its total risk-weighted assets—which include all the assets the bank holds that are systematically weighted for credit risk.
Think about the tier 1 capital ratio as a capital buffer to absorb losses and remain liquid enough to withstand a bank run. The higher the tier 1 capital ratio, the safer you are.
The average Tier 1 capital ratio for the biggest banks is around 14%, which is higher than it was during the 2008 global financial crisis. However, if more than 14% of a bank’s depositors decide to withdraw funds at any given moment, the bank will likely shut down.
Banking is supposed to be a low-risk business that can generate profits with leverage. The more money a bank can lend out at a positive Net Interest Margin, the more profit it earns. The only problem is when too many depositors decide they want their money back. SVB needed to sell its HTM securities at a loss to make its customers whole, which ended up creating more losses.
If you’re a regional bank like SVB, even with a 25% tier 1 capital ratio, it would be much easier for more of its clients to decide to withdraw their deposits. SVB was the largest bank in Silicon Valley with over 26% market share.
Will The Bank Run Contagion Continue?
Sadly, the Silicon Valley Bank bank run is likely the start of more bank runs to come. We already had the collapse of FTX, which looks more and more like fraud. Now the bank run contagion has spread to Europe with Credit Suisse coming under pressure.
Plenty of innocent individuals and companies will lose lots of money. After all, the FDIC only insures deposits up to $250,000 per depositor, per insured bank. And most of SVB’s customers were companies with way more than $250,000.
I recommend having three banking relationships to optimize terms and protect your assets. Even if you don’t have over $750,000 in cash deposits, having multiple financial relationships helps make things easier.
Leverage is great for making money on the way up, but destroys investors on the way down. And right now, regional banks are getting destroyed thanks to a funding mismatch at SVB and a crisis of confidence.
First Republic Bank ($FRC), one of the best-run regional banks, is also getting hammered. Its customer base is more mass affluent retail as opposed to startups and venture capital companies.
If First Republic Bank experiences a bank run, will the FDIC step in as well? Thankfully, yes as a consortium of larger banks have agreed to support FRC with an injection of $30B in deposits as well.
The Federal Reserve Wants People To Lose Money To Suppress Inflation
The sad thing is the Federal Reserve knew these types of bank runs would happen. It is inevitable banks would experience mark-to-market losses in their bond holdings if the Fed raises too much too quickly.
Yes, Silicon Valley Bank made a mistake by buying too much long-duration Treasury bonds near the top of the market. Instead, it should have bought shorter-duration Treasury bonds to better match its liability duration, despite the lower Net Interest Margin.
But what’s done is done. The middle-class is going to get crunched. The Fed knew banks like SVB and other regional banks would suffer from their actions, and they hiked aggressively and quickly anyway. The CEO of SVB was a Director at the SF Fed from 2019 until SVB went under.
The Fed also knows that causing a recession will lead to millions of jobs lost. But as I’ve written before, the Fed cares more about its legacy than for the well-being of middle-class American citizens. After all, the Fed governors are all powerful and rich.
Yes, as more people lose money and their jobs, the prices at grocery stores and gas stations will likely decline as demand wanes. However, please make sure you’re not one of the millions of people who lose their livelihoods in the progress!
Innocent and good people at SVB and its depositors who had nothing to do with management’s decisions and the Fed’s desires are now suffering. This is terrible.
Learned My Lesson To Not Depend On The Government In 2008
I remember Monday, September 15, 2008, like it was yesterday. It was the day Lehman Brothers went bankrupt.
On the Friday before, I bet my colleague, Will, on the trading floor $100 the government would bail Lehman Brothers out over the weekend. How could the government let contagion spread? I even bought 100 shares of LEH in solidarity. Oops.
It was then that I realized not to rely on the government for my financial well-being. Instead, it was best to only rely on ourselves. The idea of the new three-legged stool for retirement was hatched, and away I went to start Financial Samurai the next year.
Please don’t rely on saviors. They will only let you down.
Feeling Pain May Change You For The Better
The good thing about not getting bailed out is that you feel enough pain to change your ways.
After the global financial crisis, I decided to work harder, save more, and invest more prudently. My net worth became more diversified and I developed new income streams to buttress my day job income.
Without the 2008 global financial crisis, Financial Samurai would not have been born in 2009. Because up until 2008, making money was easy. Why create contingency plans?
In the short term, the ecosystem surrounding Silicon Valley Bank will take an uppercut to the chin. The contagion will spread to other regional banks, which will experience their own bank runs.
The big banks will gain more deposit dollars to make bigger profits. With the influx of more deposit dollars, deposit interest rates will likely decline, thereby making big banks even more money in the long run. That’s right, the big banks are long-term beneficiaries when regional banks collapse.
If there is no trust in the banking system, our economy will suffer. Hence, the FDIC taking over SVB and making innocent depositors whole is a net positive. SVB shareholders get wiped out, but that’s the cost of investing in risk assets.
What Does The Bank Run Contagion Mean For Us?
If you have more than $250,000 per account at one regional bank, you may want to spread out your money to other larger banks like JP Morgan Chase, Citibank, Bank of America, and Wells Fargo. It’s easy to do thanks to online banking.
If you run a business, it’s easy to let your idle cash sit in your business checking or savings account earning less than you could. I’d contact the bank and invest some of that cash into a short-term CD with a higher rate, up to $250,000. Then I’d extract the rest and leave enough only for working capital.
If you face a capital call with a venture capital, venture debt, or private equity firm that does banking with Silicon Valley Bank, I wouldn’t wire the funds now. If you do, your funds could get stuck for who knows how long even though the FDIC has taken over and promises to make depositors whole. Take a wait-and-see approach instead.
If you have investments with a private fund that does banking with other regional banks, I would contact the funds’ general partners and ask for clarity if they have yet to communicate their plans. Again, it’s not worth transferring capital yet until you know the funds can be reinvested by the fund. The reality is, everybody is scrambling.
Finally, please have enough liquidity to cover your living expenses just in case you lose your main source of income. You don’t want to have to conduct a fire sale to raise funds in a down market.
No Need To Be A Hero And Take Excess Risk Now
The current investing landscape is fraught with unknown risk, largely due to an overly aggressive Fed. Yes, we must also blame a bank’s investment committee that made poor investment choices as well. Other banks and companies will inevitably collapse due to contagion.
Hence, I think the best move is to continue to “T-bill and chill.” Earning 5%+ in risk-free Treasuries is what I plan to do while the carnage sorts itself out. There is currently a great unwinding of leveraged assets that will take time.
My main banker is the U.S. Treasury Department, which isn’t going bankrupt since it can print an unlimited amount of money. If the Treasury Department does collapse, then we will all have bigger problems to worry about.
Finally, please review your net worth asset allocation and ensure it is aligned with your risk tolerance and financial goals. The last thing you want is to lose all the financial progress you’ve made since the pandemic began.
Reader Questions And Suggestions
How are you preparing for another bank run? Do you think the contagion will spread to other regional banks and bigger banks? Will the collapse of Silicon Valley Bank and potentially other regional banks make the Fed slow down or change its rate hike decisions?
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It’s getting out of control for sure!!
Its funny – technically you could blame the Fed on both ends of this, if you wanted to: keeping rates too low for too long encouraged too much leverage & risk-taking… raising rates too fast sunk anyone who took on duration… but I think its a little unfair for a few reasons:
1. if you think inflation has been bad at the grocery store or pump over the last 12+ months, just imagine if the Fed didnt raise at all – or moved up more gradually… I wonder how hard squeezed by inflation people would be compared to today… sure they’d have their jobs if we avoid recession, but they wouldn’t be able to afford necessities if inflation accelerated any more.
2. It takes two to tango… SVB was not well diversified in its client type (geographically, retail vs. commercial, or depositor size), and it made a terrible call on the timing and magnitude its duration bet. They decided to trade credit risk for interest rate risk at a point where interest rates could only go in one direction… nobody made them do that.
3. it takes three to tango… with electronic/online banking so easy, it should have been fairly simple for start-ups to spread deposits out across institutions and remain FDIC insured (or more insured)… I assume there we’re other “perks” offered by SVB (maybe even social status) that allowed people to unnecessarily concentrate their deposits.
The government stepping in to protect uninsured deposits is a very risky signal (is it a one time deal or what?) though it was important to stop contagion… but now the cat is out of the bag, and the moral hazard we will see in banking in the future could be incredible.
All of this is to say – sure, the Fed governors are wildly disconnected for the experiences of the average American, but the are making a choice between two crappy options – let inflation rip or raise rates – both of which screw the average person.
It definitely takes two to tango. The Fed helps create boom bust cycles. It is what it is. Given we can’t control or influence what the Fed does, we must focus on what we can control. Got to make the most of things, which is the intent of this post.
I’m taking the same approach re using treasuries until things settle. Do you buy direct thru Treasury Direct or thru a brokerage like Schwab? I’ve been trying to evaluate risks with large brokerage accounts at Schwab with stocks, funds, treasuries and brokered CDs in the account. Any thoughts?
Sam
Doesn’t it make sense to pay off debt and mortgages in times like this? If you think bank runs are gong to continue and the government backstops the banks then inflation will also continue? It’s better to pay off debt with your more valuable dollars today than inflation eroded $ in the future?
Perhaps not. You don’t mind borrowing money from a bank that fails because you might get a nice reprieve from having to make payments.
Liquidity is paramount. You can pay down debt, but if you don’t 100% pay off your debt, you still have the payment.
Related: The Triple Benefits Of Paying Off Your Mortgage
I appreciate your response
I read your benefit blog and read what you said…
I decided to pay off one property at 270k at a rate of 4.87%.
I feel great…saving the 3800in cash flow.
I personally think in times like this being conservative, and not trusting Bankster’s the way to go
Thanks Sam
When you say “my main banker is the U.S. Treasury Department,” do you mainly buy T Bills from Treasury Direct, and redeem with a FS Form at a bank when mature?
Does SIPC have enough funds to make customers whole after the failure of a major investment bank with > $100B in customer funds?
I wanted to ask if short term treasury mm accounts with Fidelity get protected by SPIC…assuming they are not FDIC. Any risk in Fidelity being effected in any way now or in general?
As someone with half my net worth in Treasuries, I’m fine with the Fed continuing to hike rates. More income for me. Better bargain prices in the future.
The best thing is if we have more Fed defenders to continue pressuring the Fed to raise rates. Gives the well off even a greater ability to take market share and build wealth for our families long term.
You keep perpetuating the myth that the Fed is the villain in this inflation daisy chain.
Zoom out just a bit and recognize that inflation was created by reckless over-spending by the government….
Too many dollars facing too few goods started the process….
The Fed is simply the one with the water hose who has the unpleasant Job of putting out the flames…
Your myopic focus on the Fed as the bad guy is particularly damaging, because if we don’t correctly identify and correct the root cause, we will perpetuate the problem.
The out of control spending must stop, so going back even one step further in the daisy chain, voters need to stop voting for the big spenders before they’ve run us completely off the cliff…
Still not sure what keeps your fed-is-evil narrative going, but if you won’t correct your ways for us, do it for your children….The out-of-control spending must stop for their sakes….
Will do. Perhaps the government and the Fed are part of the same coin…
Do you think my spending is out of control and putting my kids at risk? Im currently taking advantage of the Fed’s policies by buying 5%+ Treasury bonds.
What are you doing to bolster your finances and support your family? Thanks
The Fed has two missions: 1) Stable prices and 2) Low unemployment
Powell was asked at the recent congressional hearing if he was concerned about the interest expense on our $31.4T of debt. He flat out said “No”, and repeated his 2 mandates….
It’s up to the elected politicians to care about such things, (Not the Fed)…. And the current batch of politicians obviously don’t care…
If they didn’t spend so much, the Fed wouldn’t need to have his fire hose out…
You could still write your exact same article (with the villain correctly identified) and you would actually be doing some good in the world …
Got it, to clarify, who is exactly the villain in the world in your opinion? And what is it that you are doing to help the world?
I would love to read your writing or listen to your podcast or talks. It’s always great to be the change you want to see in the world. So I appreciate if you could share your work. Thank you.
The villains are the politicians spending us into oblivion… in the the name of vote buying….
The consequence is inflation… which requires the Fed to address by raising rates… which in the context of your post, is ultimately responsible for the demise of SVB….
So the solution is to vote out the spenders…. If we had gotten root cause corrected already, SVB wouldn’t have gone bankrupt….
Do you see how this works?
As for reading my writing, I guess you’re doing that right now….And I in turn read yours, as long as you don’t perpetuate false narratives…
Got it. Sounds simple enough. Why did we vote for spenders in the first place? And who would you vote instead to ensure spending is more aligned so that the demise of SVB won’t happen? It’s worth exploring how politicians can affect a bank’s investment committee to buy long-duration Treasury bonds.
Please keep the advice coming. Can you share your background so we have an idea of where you are coming from?
The reason “we voted for the spenders in the first place” is because we don’t chase problems back to root cause….
Instead we latch onto politically-motivated narratives…
Just like in your post when you say:
“The Fed also knows that causing a recession will lead to millions of jobs lost. But as I’ve written before, the Fed cares more about its legacy than for the well-being of middle-class American citizens. After all, the Fed governors are all powerful and rich.”
I don’t believe that you can’t see the manipulation in these words…. Why not just explain that the Fed is just fulfilling its mandate…. While the Trillion dollar government spenders do everything in their power to make his job more difficult….?
If people who refer to themselves as “Financial Samurai” don’t do a more intellectually honest job of explaining things, we’re just going to keep getting more of what we’re getting: $31.4T debt, historic inflation, bank runs, et al….
Yes, I agree the Fed is just fulfilling its mandate about maintain inflation and unemployment.
And if you are hurting financially, I apologize for helping cause this crisis by spending too much. If I can help you specifically, please let me know.
Please share some of your solutions. Who would you vote for and what is your background? I promise I won’t judge you. It’s just good to know who I’m conversing with. Thanks!
Sam you’re the best. You always keep your cool when responding to abrasive commenters, even the ones who are off their rocker. Thanks for all your articles including this one.
@Jamie
You think someone speaking up with another perspective and urging for a deeper look for the root cause, is “off their rocker”? How else is discourse beneficial if multiple viewpoints cannot bring up valid points as a contribution towards furthering the conversation? That’s the whole point of the comment section or any conversation anywhere.
This attitude needs to change to be more inclusive of valid points worth both considering and integrating into the conversation.
FYI, The seven members of the Board of Governors of the Federal Reserve System are nominated by the President and confirmed by the Senate. A full term is fourteen years.
People vote for the President and the Senate.
It sounds to me like you’re basically an angry Republican. FYI, Jerome Powell was elevated to chairman by President Donald Trump (succeeding Janet Yellen).
Again, cognitive dissonance in the works for you.
I think so too. He sounds po’d about the people in power and believes they’re entirely to blame for everything that’s happening right now.
If you are surmising that I’m PO’d that we haven’t learned as a society that rampant government spending leads to historic inflation, just like it did in the 70’s…Then yes, that is a fair characterization.
Are you somehow ok with $31.4T in debt that’s projected by the CBO to rapidly grow to over $50T….
Let me ask you this, what’s 5% annual interest expense on $50T in debt?
Why are you not also PO’d…?
Is whatever you’re getting in the way of handouts today worth the long-term consequence…?
Why is it always the young people who vote for this stuff…. It’s been going on like this for generations…. Young people vote for free stuff…. then they mature and see all the horrific consequences….
But just as they figure it out, a new group of young people come along and need to learn the same old lessons all over again…
Your comment reminds me of a 12 year old who is trying to use a new term he just heard in a sentence.
Let me help you out:
Cognitive Dissonance = the state of having inconsistent thoughts, beliefs, or attitudes.
Look, you revealed your cards already. It’s too bad you’re losing money, can’t understand what cognitive dissonance means, and don’t have a Republican in office. Just suck it up and stop blaming people on the Internet for your losses. You just come across as a whiny loser. But it is entertaining time with people like you.
not to answer for him (but to answer for him), he seems to be saying government spending due to elected officials, so I intrepret it as “elected officals” are the villians in their world.
Hi Sam,
Nice article, as always. Am surprised by some of the acerbic comments here, though.
Just a nitpick from me. You say “However, if more than 14% of a bank’s depositors decide to withdraw funds at any given moment, the bank will likely shut down.”
This is a bit off conceptually, though I know you used the word “likely” :) . It should read as “if 14% of a bank’s deposits get withdrawn at any given moment, then hell yeah the bank will most probably shut down!” But if 14% of the depositors (holding the smallest deposits) withdraw simultaneously, then the bank will probably survive depending on how much percent of the deposit base those 14% of depositors account for.
Hope the markets stay calm for now!
Best wishes,
Indian “former credit & sell-side banking analyst” Tiger
I wonder if you are experiencing cognitive dissonance and unaware of the bear market, the collapse in banks, the decline in inflation from 2022, and the many jobs lost. These things wouldn’t happen if the Fed wasn’t so aggressive.
Most of us are rich and will be fine during the collapse. But many people will also be hurt.
As a fellow white male Republican, I feel your pain and frustration.
Trump elevated Powell, a fellow white male Republican, so we need to feel loyal to him. At the same time, it hurts that he and his governors were so aggressive in raising rates.
I see you my man. But let’s also be honest. There is so much truth to this post.
If you invest in Treasuries through your brokerage account, would these treasuries still be safe if the brokerage went under?
Yes, should be safe. But may take longer than you like to sell if you need to sell.
No, they actually wouldn’t be safe.
If I’m not mistaken you can be covered by more than 250k by adding beneficiaries. I had read adding 3 TOD plus yourself gives you up to 1 mil FDIC insurance
Correct, it’s by ownership category.
You get up to $250,000 in coverage for each ownership category, even within the same bank. The ownership categories recognized by the FDIC are:
Single accounts: Any account owned by one person only, including checking accounts, savings accounts, money market deposit accounts and CDs. This also includes business accounts in which one person is the sole proprietor.
Certain retirement accounts: Covered retirement accounts include traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP IRAs, self-directed 401(k)s, profit-sharing plans, self-directed Keogh plans and section 457 deferred compensation plans.
Joint accounts: Accounts opened by multiple people, including spouses. The FDIC insures $250,000 per person in joint accounts (for a total of $500,000) and divides money equally among owners for this purpose.
Revocable trust accounts: A deposit account that identifies one or more people as beneficiaries who will get the contents of the account when the owner dies.
Irrevocable trust accounts: A deposit account established by a statute or written trust agreement in which the owner cedes power to change or cancel the trust.
Employee benefit accounts: Deposits of a pension plan or other defined benefit plan that is not self-directed.
Corporation, partnership, or unincorporated association accounts: Deposits owned by corporations, partnerships and unincorporated associations. This includes both for-profit and not-for-profit organizations.
Government accounts: Deposits owned by federal, state or local government, or an Indian tribe.
Married couples will have another option for maximizing their FDIC insurance coverage. You and your spouse each can open individual accounts at a single bank, resulting in each of you having up to $250,000 FDIC-insured. You can then also open a joint account and each has $250,000 insured in that account. Between those three accounts, you could have up to $1 million FDIC-insured at one bank.
I read that some VC companies told their clients to withdraw everything from SVC. This was pretty early on and it spread fear. It seems like partly their fault too.
Our paying bill money is in a regional bank. I’m a bit scared our money might be inaccessible so I moved a bit to Chase and Fidelity. Gotta make sure we have money to pay bills. You’re right about bigger banks. They’ll profit from this. Chase savings account pays 0.01% interest.
It was definitely due to the VC’s telling their clients to pull their money. That is what started the hysteria and caused SVB to be insolvent. Those VC’s didn’t show too much loyalty to a bank that had been there for their community (VC backed start-ups) for years and didn’t give the bank the opportunity to dig out of the financial hole they found themselves in due to the rising interest rates. If everyone just chilled, this wouldn’t have happened.
Yes Chase’s saving account interest rate is such a joke especially in today’s terms. But their size and stability are worth a lot in this time of uncertainty.