In late 2022, Silicon Valley Bank (SVB), the 16th largest bank in the US, faced a bank run. This crisis didn’t stop there; it spread to other regional banks like First Republic Bank, Signature Bank, Zions Bancorp, PacWest, Comerica, and Charles Schwab. Even the biggest banks felt the impact.
The Federal Deposit Insurance Corporation (FDIC) stepped in on March 10, 2023, announcing it would take over SVB. Depositors with up to $250,000 were assured they’d have access to their money by March 13, 2023. The FDIC also planned to find a buyer to ensure depositors with over $250,000 would get their money back.
SVB had $209 billion in assets and $175.4 billion in deposits. Surprisingly, about 87% of SVB’s deposits were uninsured as of December 2022. However, the Federal government decided to protect all SVB depositors on March 13. They also shut down New York’s Signature Bank and guaranteed all its depositors to prevent the crisis from spreading further.
So, why did this bank run happen?
Firstly, a bear market hit in 2022, causing SVB’s share price to drop by 66%. This meant its clients couldn’t raise as much capital or keep depositing as much money at SVB. SVB’s main clients were technology companies, startups, biotech, venture capital, and private equity firms.
Secondly, the Fed raised interest rates aggressively. This made SVB’s cost of capital, its deposits, more expensive. SVB had to offer higher interest rates to attract and retain deposits. Normally, this wouldn’t be a problem because banks can lend out deposits at an even higher rate of return, known as the Net Interest Margin (NIM).
Thirdly, in 2021, SVB 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 these Treasury bonds in 2021 was close to the top of the market. When the Fed started raising rates, the value of SVB’s HTM portfolio plummeted.
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 was losing money (negative Net Interest Margin). SVB borrowed short and lent too long, which is painful when the yield curve inverts.
When SVB tried to raise $3 billion in equity to cover its shortfall and couldn’t, the bank run accelerated. SVB’s clients began withdrawing money because they lost confidence in the bank’s ability to provide access to their deposits.
The FDIC stepped in to ensure SVB’s depositors were protected. This was crucial, especially considering the negative impact on innocent parties. Thousands of startups were negatively affected because their money was stuck at SVB, potentially preventing them from paying vendors and making 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. 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.
The SVB bank run could be the start of more bank runs. We’ve already seen the collapse of FTX, and now the contagion has spread to Europe with Credit Suisse succumbing to a takeover by archrival, UBS. Many innocent individuals and companies will lose a lot of money. After all, the FDIC only insures deposits up to $250,000 per depositor, per insured bank. Most of SVB’s customers were companies with way more than $250,000.
The current investing landscape is fraught with unknown risk, largely due to an overly aggressive Fed. Other banks and companies will inevitably collapse due to contagion. Hence, it’s best to continue to “T-bill and chill.” Earning 5.3%+ in risk-free Treasuries is a good plan while the carnage sorts itself out.
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.
