Banking Collapses and What It Means For You and Me
So you may have heard that two U.S. banks - Silicon Valley and Signature collapsed last week. But why did this happen and what does it mean for you and me?
Well, let's start with the why.
Have you ever played Jenga and pulled out one too many blocks, causing the whole tower to come crashing down? That's kind of like what happened with Silicon Valley and Signature Bank.
These two banks had a lot of money in them, but they weren't managing it well enough. They had too many risky loans and investments, which led to them not having enough money to keep going.
When a bank collapses, it's like pulling out the wrong block in Jenga. The whole tower comes crashing down and people who have money deposited in the bank may lose some or all of their money.
But the above is a super simplistic way of explaining what happened. I think you can handle a little more, so I'm going to share what CPA Meg Wheeler wrote in her email newsletter last week:
Another day, another bank run.
Oh wait, this isn’t 2008 still… but after this past weekend, it may have felt like it.
How exactly does a bank work?
From the consumer’s perspective, a bank is pretty straight forward. We give them our money, and when we want it back, they give it back to us.
But from the back end, a bank’s operations are a little more complex. In order to make money, the bank takes our money and invests it. This allows them to make money (business gotta business, ya know). This also means that not 100% of the bank’s deposits from customers are “liquid” (or available) 100% of the time.
There are rules around how much cash banks have to keep liquid, so that in the event a lot of people want their money bank, a bank is not sh*t up a creek. But what happens when everyone wants their money bank?
What is a bank run (or a “run on the bank”)?
When everyone (or a large majority) of customers want their money bank, they create a run on the bank. The bank doesn’t have enough cash to satisfy these withdrawal requests and it has to cash in its investments (often at a loss), and even then it may still not have enough money to satisfy its customers (this happens when their investments have taken larger losses).
What is Silicon Valley Bank (SVB)?
Basically, a bank for startups. It’s the 16th-largest bank in the US and had $209 billion in assets at the end of 2022. Nearly all of those assets came from tech startups and investors.
So what the hell happened?
Late last week, SVB announced that it was trying to raise funds because it was having a capitalization problem (meaning, not enough cold, hard cash on hand).
This freaked out its customers, who basically all panicked and scrambled to take their money out. Cue the run on the bank.
As a result, Federal regulators took over the bank (yes, they can do that) on Friday to stop the bleeding. This resulted in the 2nd largest failure of a bank in basically, forever, and the largest failure since the death of Washington Mutual in 2008.
OK but WHY did this happen?
SVB’s problems go further back than last Friday. As I noted above, banks invest their customers’ funds to make money. Unfortunately for SVB, a few factors made this particularly challenging over the last year
The Federal Reserve has been raising interest rates, which means SVB’s customers (tech companies) faced higher borrowing costs and therefore needed more of their cash to pay their bills.
One of the investments SVB favored were long-term bonds, which are actually fairly safe. But they bought a lot of these back when interest rates were super low. So SVB’s investments weren’t returning them a whole ton of money (I’ve seen the figure of an average yield of 1.79% thrown around).
To combat their sad balance sheet, SVB sold many of its securities at a loss and announced it would sell $2.25 billion in new shares to bring in more cash. There’s nothing customers love hearing more than “we sorta don’t have that much money so can you please give us more?” Whoopsie.
What happens now?
The FDIC insures bank accounts up to $250,000, so federal regulators have said they expect customers to have access to the insured portions of their accounts by today.
And then in a blink-and-you’ll-miss-it hail Mary that only seems to occur when wealthy white guys are in trouble, the government announced that they would cover ALL of the deposits in the bank, whether or not they had been insured. (Side note: This is coming at “no cost” to taxpayers, as the funds will be taken from the FDIC’s deposit insurance fund).
Great, but how does this affect me?
Unless you held your funds at SVB or work at a tech startup, it probably doesn’t. At least not short-term. Most experts believe that this is an isolated incident and not a systemic failure of the US banking system. And some have argued that this actually shows the FDIC and US banking system working - when times get tough, we have the right protections in place to prevent chaos.
Given the government’s late-Sunday-night relief for all SVB depositors, we likely won’t see mass layoffs in the tech industries that we were expecting when this all happened last Friday. But it wouldn’t surprise me if we still see some shake-ups - this has affected tech stocks and confidence in the VC-backed world.
If you invested in the stock market, you may see some short-term dips. But remember that investing is a long-term gain so don’t rush to pull your funds out at a loss.
And if you happen to have more than $250,000 in one bank, change that fast. While the government backed 100% of deposits in this case, there is no guarantee that they will do it next time. (From Katy - Also remember the FDIC insures up to $250K per owner, per bank, and per ownership type.)
Now, if you're concerned about your bank and where to put your money, both personally and for your business needs, I really like what Natureza Gabriel, Founder and CEO of Hearth Science & Co-Founder of Academy of Applied Social Medicine, wrote in Medium...
SVB Fail: What is Being Missed Entirely in the Conversation about First Republic Bank
By
In the wake of the failure of Silicon Valley Bank, regional banks in the United States have, as a category, been identified as having heretofore unidentified structural and financial risks. At a macro-economic level, these risks are a result of changes to monetary policy made by the Fed in order to rein in inflation, which has lowered the value of long-term assets held on the bank’s balance sheets. What happened at Silicon Valley Bank, however, was not simply a unique result of a financial miscalculation based on rising interest rates, or poor risk management, but these factors combined with their own hubris, extremely poor communication, and the targeted actions of an incredibly small number (a couple dozen) of venture-capital clients, who directed their portfolio companies to withdraw their funds in a sudden coordinated manner. In this situation, the actions of a few dozen extraordinarily affluent VCs set in motion the aggressive withdrawals that preceded the bank failing, and being taken over by the FDIC.
As this story unfolded, between Wednesday March 8 and Friday March 10, and continuing this week of March 13, a number of regional banks with depositor profiles (customer bases) with statistical resemblance to Silicon Valley Bank were identified as high-risk, and entered the news cycle.
I have banked with First Republic Bank for nearly twenty years. I had almost never seen them in the national news. They are our personal bankers, and they bank my start-up. About a year ago, when we were in process on a Series A funding round, I was advised to move our accounts to Silicon Valley Bank, and I took a discovery call with SVB.
What has always surprised and delighted me about First Republic Bank–and if you are familiar with our work you will understand I am not generally delighted by capitalism, because our work is focused on connection, and capitalism generally disconnects– is the degree to which I feel valued by them as a human being. In my forty-seven years, prior to banking with First Republic, I had never had a bank express any interest in me as a person whatsoever. The bankers didn’t know my name, they didn’t know about my family, and they didn’t care. There was no relationship. As a customer of every other bank I’ve ever dealt with, my experience has been entirely transactional. With First Republic, from the start, I was treated as a person in whom they were genuinely interested. This interest and regard clearly had nothing to do with how much of our money the bank was holding, because at the time we formed the relationship I was not the Founder and CEO of a growing global business, but a waiter finishing my undergraduate degree. Yet First Republic did things like phoning me if I was about to bounce a check. Or giving me an umbrella when I was caught in a downpour. And I began to notice that their employees didn’t leave. They stayed with the bank for years and years. I would walk into the bank, sit down with someone I had built a relationship with over time, have a conversation, and they would take care of our banking needs. They had created a human-centered culture in a sector that is generally transactional.
When I had a discovery call with Silicon Valley Bank I remembered why I don’t generally like banks. I was made to feel small, insignificant. I was condescended to. I got the feeling that I often get when interfacing with transactional systems: that I was being scouted for extraction; that SVB’s primary analysis was what could they suck out of me and my company. Having spent a number of years as a start-up, having gone through several funding rounds seeking mission-aligned investors, partners, and stakeholders, this interaction with the extractive mind was familiar to me, and chilling. I wouldn’t have banked with Silicon Valley Bank if they had been the only bank in town, because I didn’t like the way they made me feel.
And this brings me back to First Republic, and the surreal experience of watching the company being thrashed about and trash-talked on Twitter, and by daytraders and investors seeking to make a buck. It’s like watching someone you grew up with being dissected by talk show hosts. I keep thinking– But you don’t know them. You don’t know anything about them. Whatever statistical profiles may tell you about a bank’s customers, there is something crucial that is missing from this analysis, which leads me to a different conclusion about the bank’s vitality and importance. First Republic’s business is not built around offering the highest depositor rates, although they might do that. It is built around relationships. I personally admire, appreciate, and work to emulate, in our own business, the degree of consistency and reciprocity I have been shown by First Republic Bank. I admire its culture. And I believe that what it represents is important. They are a self-described client services firm that happens to be a bank.
I want to live in a world where relationships matter. At the heart of things, relationships may be all that matter. I want to live in a world where companies of all kinds have hearts. I want to live in a world where what gets seen first is our humanity, not the size of our bank accounts. And so it is important to me that First Republic thrives, because they have been part of our thriving.
I don’t generally spend my time writing a love letter to my bank. But I would be remiss, in a world where our attention is being siphoned off in the direction of chaos, spectacle, and scandal, if I didn’t express my appreciation to a company that has been a partner to my family and my business for twenty years, doing exactly what a bank ideally would: treating us as people with intrinsic value, and being a steadfast partner in helping us use money to build the kind of world we want to live in.
Don’t listen to the haters, First Republic. They don’t know you. We are customers for life.
With warmth,
Natureza Gabriel Kram
Founder and CEO, Hearth Science
Convener, Restorative Practices Alliance
Co-Founder, Academy of Applied Social Medicine
My takeaways: whether it's a bank or any other place you're planning to spend or invest your money, go with businesses that really care about you as an individual, businesses that align with your core values and businesses that aren't about just being out there "making money," without a conscience or soul. It's important that we are constantly voting with our dollars, and the way we do that, is to make sure we are choosing carefully where we want to spend or invest our money.
With Love & Gratitude,
