This Bank Panic Should Not Exist
The most important bank in Silicon Valley failed on Friday, prompting a Sunday night bailout for some of the wealthiest people in the world as the Federal Reserve opened a new emergency lending program hoping to prevent the crisis in California from triggering a nationwide banking collapse. As with any financial crash, it’s impossible to predict where exactly the money will flow next, but it’s clear that the tech sector that reshaped American business and culture in the 21st century is coming apart.
The nexus of this breakdown is Silicon Valley Bank, a firm with $209 billion in assets as of December 31, 2022. SVB works hand-in-glove with venture capital firms, tech start-ups, and a lot of very rich people in California, claiming nearly half of all VC-backed tech companies and over 2,500 VCs as its clients. Its demise is the immediate product of horrendous risk management by the bank’s officers—but there are also important public policy failures here, particularly the Fed’s high-interest rate policy and a reckless, bipartisan bank deregulation law signed by President Donald Trump in 2018.
It’s hard to imagine a deeper embarrassment for Silicon Valley. Tough-talking tech dudes who spent years celebrating the genius of free markets totally lost their minds in a bank panic, failed to coordinate a private rescue of their own sector, and then went whining to the federal government for a bailout. What’s worse, many of these guys—including SVB Bank CEO Greg Becker—lobbied Congress to eliminate tougher capital and liquidity regulations for banks like SVB, and got what they wanted. Becker’s testimony to the Senate Banking Committee (see p. 114) feels destined for the corporate hubris canon. Hailing “SVB’s deep understanding of the markets it serves, our strong risk management practices, and the fundamental strength of the innovation economy,” Becker declared that, “SVB, like our mid-sized bank peers, does not present systemic risk.”
And yet, on Sunday night, the federal government officially declared SVB a “systemically important financial institution” in order to ensure that its depositors didn’t get wrecked by Becker’s shoddy risk management. So many people stood to lose so much money from SVB’s failure that the government invoked special emergency powers to keep the bank’s clients from losing their shirts.
The mechanics of SVB’s collapse are relatively straightforward. The bank bought up a ton of long-term Treasury bonds and mortgage securities when interest rates were low over the past few years. When the Fed raised interest rates, those bonds became less attractive on the open market—newer bonds came with higher payouts, making SVB’s older bonds harder to sell off in a pinch. So when SVB’s depositors began drawing down their balances this year to meet business expenses, the bank was forced to dump its bonds at fire-sale prices to obtain the cash it needed to meet customer withdrawals. As the bank ran low on cash, it announced plans to raise more, and a bunch of influential people in Silicon Valley panicked, withdrawing their money en masse in a classic bank run. Fail fast, indeed.
The Federal Deposit Insurance Corporation has long guaranteed that depositors will not lose a penny in a bank failure, provided they have less than $250,000 in their bank account. But in SVB’s case, over 95% of the bank’s deposits were stashed in much larger accounts. A lot of these customers are rich people who were too lazy to manage their money more carefully, but a lot of them are also actual businesses that used those accounts to meet payroll and other basic expenses. Roku, which sells consumer hardware for digital streaming services, had nearly half a billion dollars stashed at SVB. Thanks to the emergency measures the government announced on Sunday night, none of these accounts will suffer losses from the bank’s failure.
Rescuing SVP’s depositors is a prudent and reasonable step for the government to take. As anyone with a checking account understands, depositors don’t manage the banks where they keep their money. There is no moral hazard involved in shielding them from losses. SVB’s shareholders and executives screwed up here, and unlike the bank bailouts of 2008 and 2009, the government is not rescuing them. And despite the $250,000 threshold, there’s quite a bit of precedent for rescuing depositors with large accounts—the FDIC has essentially been doing it since 2008. During the crash, the deposit insurance limit was formally raised from $100,000 to $250,000, and in the years since the FDIC has arranged mergers and taken other measures to keep depositors from losing money while other creditors are forced to take haircuts.
That is generally a good policy. Deposit insurance is a critical way to prevent financial contagion from spreading and to fend off unnecessary bankruptcies. Roku might have been stupid to park so much money with SVB, but it would be insane for it to be forced out of business for that mistake. If regulators allow other banks and businesses to be pushed into failure by one bank’s mismanagement, then the scope of a relatively small banking crisis can grow exponentially in a matter of days. The fact that SVB’s depositors include some of the worst people in the world does not invalidate a century of hard-won financial crisis-fighting wisdom.
The real outrage is that any of this became necessary at all. If Congress hadn’t gone out of its way to deregulate banks like SVB, SVB very likely would not be in this situation. Back in 2018, 17 Senate Democrats joined a unanimous bloc of Senate Republicans to eliminate important capital and liquidity rules for 25 of the 38 largest financial institutions covered by American banking law. Becker and other executives of large regional banks insisted that the rules written in the aftermath of the 2008 financial crisis were too stringent—they were designed for multitrillion-dollar behemoths, but firms with as little as $50 billion in assets were being subjected to them. Sensing a political fundraising opportunity, swing-state Democrats helped Republicans write a bill to aid guys like Becker, and then pitched it to the public as a lifeline for mom-and-pop operations.
Senator Mark Warner (D-Va.) wrote a down-home op-ed in the Tidewater News claiming the bill would abolish “excessive regulations” that were “making it too expensive, too time consuming for small banks and credit unions to serve consumers, farmers, and small businesses.” His colleague Senator Tim Kaine (D-Va.) called the bill a victory for “rural and underserved communities,” while senators Heidi Heitkamp (D-N.D.), Jon Tester (D-Mont.) and Joe Donnelly (D-Ind.) declared that the bill would “provide mortgage and other credit to hardworking Americans, helping them and their families grow and start businesses.” Trump agreed: “We are unleashing the economic potential of our people.”
These claims were preposterous. The regulations in question involved basic banking practices—how much debt banks were allowed to rely on, and how much cash they had to keep stashed away to meet an emergency. The entire point of the rollback was to permit bigger short-term profits from bigger long-term risks, and it was tailored for banks with up to $250 billion in assets—not exactly a hardscrabble set.
When pressed on these points, bank-friendly Democrats pointed to Barney Frank, the Massachusetts liberal who cowrote the congressional response to the 2008 financial crisis. After he retired from government, Frank joined the board of Signature Bank, a New York–based firm that, at the time, controlled about $40 billion in assets. By 2018, the bank was up to $47 billion, and Frank decided to join Becker and others in calling to roll back the very regulations he had written in Congress, enabling Signature to grow past the $50 billion threshold without triggering stricter liquidity and capital requirements.
Signature got a pretty good deal out of Frank. They’ve paid him almost $2.5 million since he joined the board at the end of 2015, as the bank nearly tripled its balance sheet to $110 billion, with a particular focus on the cryptocurrency sector. On Sunday night, the feds took over Signature Bank too. Its involvement in the cratering crypto world and the fears spreading from the SVB failure had sparked a run on Signature, and regulators were unwilling to chance any further losses. Again, this is probably the right move to ensure that the government can take care of Signature’s depositors at the lowest cost possible.
But there is more to economic management than rescuing deposits. Civil and criminal probes are warranted here. Becker has been paid more than $45 million since 2018, according to SEC filings, and he dumped $3.6 million in SVB stock on February 27 as his firm was collapsing—not a traditional marker of sound fiduciary stewardship. It is extremely unusual for so many companies to be keeping so much cash in a single institution—particularly when the VC bigwigs they worked with were also carrying very large accounts at the same firm. It is essential that the government not repeat the mistakes it made after 2008, when prosecutors simply decided not to pursue clear-cut cases against fraudulent activity. Anything illegal must be pursued—to do otherwise would damage American democracy.
The entire debacle, moreover, reveals that the Fed hasn’t been paying enough attention to financial stability. Federal officials do not announce Sunday night bailouts when things are going according to plan. In his quest to eradicate inflation, central bank chairman Jerome Powell has been raising interest rates fast, ignoring the possibility that doing so could trigger a rapid repricing of assets and set off an event like the SVB failure. Regulatory failures don’t excuse reckless bank management, but they’re still failures.
There is, in fact, a dissonance between the Fed’s recent bank rescues and its stated policy on inflation. By raising interest rates, central bankers deliberately impose higher financing costs on businesses and restrict the supply of credit. This forces companies to either cut back on labor costs or simply go out of business. The idea is to reduce the purchasing power of ordinary people, which will eventually encourage retailers to slash prices. Voila, inflation vanquished.
In theory, anyway. So far, the tech sector has proved uniquely sensitive to higher rates. After months of rate hikes, job growth remains very strong in the economy at large. Tech, by contrast, is really hurting, with more than 120,000 layoffs announced in 2023 alone.
This makes the SVB rescue a little curious. With one hand, Powell and the Fed induce tech layoffs to curb inflation, while with the other, they rescue tech workers to prevent a financial crisis. This is not a particularly effective way to run an economy.
But whatever the Fed does next, it’s hard to imagine the tech landscape surviving long in its present state. All of these layoffs and bank failures indicate that the VC-oriented tech world was largely dependent on ultralow interest rates. The chaotic irresponsibility of Silicon Valley’s best and brightest in the SVB crash certainly does not inspire much confidence in the entrepreneurial savvy of California’s investor class. They’ve already told us they can’t save themselves.
[Zachary D. Carter is a consultant with the Hewlett Foundation's Economy and Society Initiative. He was previously a Writer in Residence with the Omidyar Network's Reimagining Capitalism initiative, and spent 10 years as a senior reporter at HuffPost, where he covered economic policy and American politics. His work has appeared in The New York Times, The Wall Street Journal, The Washington Post, The Atlantic, The New Republic, The Nation, The American Prospect and other outlets.
Zachary began his career at SNL Financial (now a division of S&P Global), where he was a banking reporter during the financial crisis of 2008. He wrote features about macroeconomic policy, regional economic instability, and the bank bailouts, but his passion was for the complex, arcane world of financial regulatory policy. He covered the accounting standards that both fed the crisis and shielded bank executives from its blowback, detailed the consumer protection abuses that consumed the mortgage business and exposed oversight failures at the Federal Reserve and other government agencies that allowed reckless debts to pile up around the world.
At HuffPost, Zachary covered the implementation of the 2010 Dodd-Frank financial reform law, political standoffs over trade policy and the federal budget, and the fight over the future of the Democratic Party. His feature story, “Swiped: Banks, Merchants and Why Washington Doesn't Work for You” was included in the Columbia Journalism Review’s compilation Best Business Writing.
Zachary graduated from the University of Virginia, where he studied philosophy and politics. He lives in Brooklyn, New York.]