If it gets bailed out, will every bank be too big to fail?
Whispers about insolvency. A bank run. A desperate attempt to raise funds. A bank failure. Market gyrations. Concerns about financial contagion.
History is repeating itself. Today, California regulators shut down Silicon Valley Bank, a lender aimed at start-ups, technology firms, and wealthy individuals. The Federal Deposit Insurance Corporation stepped in as the bank’s receiver. Account holders with less than $250,000 in savings will have full access to their funds as of Monday, the FDIC said. Account holders with more than that—the overwhelming majority of entities banking with SVB, according to the bank itself—will have to wait and see.
This is a debacle, one that will reverberate throughout the Bay Area and the tech ecosystem. In the near term, the biggest risk is that start-ups doing bread-and-butter banking with SVB might not be able to make payroll in the coming days and weeks, forcing them to miss paychecks or even announce furloughs or layoffs. In the medium term, the risk is that companies holding cash in other, smaller banks might worry about their stability, withdraw funds, and spread financial contagion.
In the long term, the danger is that the government might end up bailing SVB out, proving that all banks are too big to fail in the American system.
In the past few days, SVB came to experience a classic It’s a Wonderful Life–type bank run. On Wednesday, the bank’s publicly traded parent company announced that it had sold some securities at a loss and was trying to raise cash by selling its own shares. This stoked fears that the bank did not have enough cash to cover withdrawals, leading depositor companies to pull their funds, which then led to a solvency crisis.
The underlying problem was a straightforward lack of diversification, as Bloomberg’s Matt Levine has noted. SVB’s clientele is heavily concentrated in the tech industry, which boomed during the pandemic.
