The Where, the How & the When

Nevin E. Adams, JD

You may have missed it, but there was a mini-financial panic over the weekend — and it may not be over yet.

I’m referring, of course, to the travails of Silicon Valley Bank, or SVB, as it’s been generally referred to. By most accounts, it’s something of an anomaly in banking — catering to tech startups, venture capitalists, and the like. There are reports that only about 11% of its deposit base was insured under the $250,000 insurance protections of the FDIC, though the U.S. Treasury decided to offer that protection to all its deposits as the bank — the 16th largest in the US, as it turns out — was deemed “systemically important.” 

There is some support for that notion. The series of events that led to the second-biggest bank failure[1] in U.S. history apparently began with a “run on the bank” — depositors, perhaps concerned about their (uninsured) deposits, went to pull out their funds to the tune of some $42 billion (about a quarter of the bank’s total deposits). Those deposits (and there was a LOT of them, during the pandemic) had been invested elsewhere, reportedly in longer-term securities (Treasuries and Mortgage-backed Securities) that, while high quality, with the recent surge in interest rates, had lost value — all the more so in these “fire sale” conditions. In fact, SVB had been losing deposits, and selling securities at a loss to cover them for some time — and it was the disclosure of that activity on the firm’s 8-K on March 8 that set off some alarms — and the $42 billion in withdrawal requests the following day.

And while at some level, it would be comforting to think that SVB is a financial anomaly, as a series of other regional banks have come under scrutiny, it’s clear that the issue here — a mismatch between when you need the money and the ability to access it — is, to say the least, problematic.

By all accounts, SVB’s issues are a matter of a timing mismatch (although there are plenty of voices already saying it was not only foreseeable, but avoidable), rather than the type of speculative financial “shenanigans” that have rippled through the markets during past crisis.[2] That doesn’t mean there won’t be short-term pain[3] for some depositors of SVB, some likely collateral damage in confidence for regional banks generally (both shareholders and depositors) — and calls for increased regulation. There will doubtless be no shortage of 20/20 Monday-morning quarterbacking, a fair amount of recounting how the early warning signs were there, but ignored, and almost certainly a lot of finger-pointing — at least that’s been the case in prior such occurrences. With any luck at all, some or all of it will actually prevent future occurrences — or, God forbid, worse things. 

But it should serve to remind us all that it’s a good idea to not only know where your money is invested, but how — to know when you might need access to that money — and, most importantly, how the where and the how match up with the when you might need it.

Footnotes

[1] Only Washington Mutual’s $307 billion failure in September 2008 was larger in terms of bank assets.
[2] However, it’s early days, and the full impact/underlying causes may turn out to be more complicated than that.
[3] Ironically, the markets were generally higher yesterday — supposedly because there was a sense that this might slow down the pace of Federal Reserve interest rate increases.