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The Demise Of Silicon Valley Bank... and If Cash Is Not King...
Howard Lindzon
March 12, 2023
Good morning…
I do NOT bank at Silicon Valley Bank. Social Leverage Funds I & II have low deposit levels at Silicon Valley Bank (below the FDIC threshold).
I would tell you where I bank, but I am worried Peter Thiel might find out.
Actually, in case Peter is listening, I bank at WELLS FARGO and my PIN is 6969 and my password is ‘Gawker’.
Sadly and seriously, on Friday, Silicon Valley Bank failed and regulators (The FDIC) seized the assets and control.
The internet is giving credit for the bank run on Peter Thiel.
Marc Rubinstein, my go to banking human (I had him on my ‘Panic’ podcast back in April 22 where he talked about banks going bust - minute 37), wrote the definitive post on Friday ‘The Demise of Silicon Valley Bank’ and calls it ‘the first bank run of the digital age’. His Afterword really hit home:
Afterword
For the industry overall, the episode is likely to cast a long shadow. It’s been 868 days since a bank last failed in the US, close to the longest stretch on record. In the meantime, consumers have become inured to the risk, evidenced by the growth of uninsured deposits, including in digital wallets.
One of the features of banking crises is that they rarely repeat consecutively. This matters because policymakers have a tendency to craft regulation around the last war. US stress tests include all manner of scenarios for bad credit, but few for interest rate shocks. The severely adverse scenario for 10 years Treasury yields is 0.8-1.5%; the baseline scenario, reflecting a shallower recession, incorporates yields of 3.2-3.9%.
In Europe, interest rate risk is overseen by regulators through the Liquidity Coverage Ratio (LCR). It requires banks to hold enough high-quality liquid assets (HQLA) – such as short-term government debt – that can be sold to fund banks during a 30-day stress scenario designed by regulators. Banks are required to hold HQLA equivalent to at least 100% of projected cash outflows during the stress scenario.
Credit Suisse withstood its surge in deposit outflows with an average LCR of 144% (albeit down from 192% at the end of the third quarter). Silicon Valley Bank was never subjected to the Federal Reserve’s LCR requirement – even as the 16th largest bank in America, it was deemed too small. It’s a shame. Regulation is not a panacea since banks are paid to take risk. But a regulatory framework to suit the risks of the day seems appropriate and it’s one US policymakers may now be scrambling for.
My friend Paul Grinberg who is Chairman of public bank Axos Financial wrote this to me which should be the first thing they now teach founders at Y Combinator:
Since Thursday, our Social Leverage team has been on the phones with founders and banks making sure a go forward plan was in place. We put together and shared this Google document for them Friday that details go forward recommendations.
I do not have exact numbers yet, but based on people I follow that invest in startups, it seems like 20-30 percent of startups right now bank at Silicon Valley Bank. I do not have the number of those that also have a second bank account but that will be 100 percent by next Friday.
So here we are on Sunday morning and the internet is doing its thing …fearmongering.
I have no idea why Yellen et al have not guaranteed deposits yet. We live in an era of the internet and waiting until Sunday evening is stone age behavior.
I am not a believer in ‘bailouts’.
I do believe Yellen and company should make depositors whole and should have announced that Friday evening. Making depositor’s whole is not a bailout. It is the only way to stop a total run on the banks.
There is an old saying…‘Cash Is King’.
Unfortunately that is outdated.
It should read…’Treasuries are King’ or ‘Cash is King up to $250,000.00’
This panic will push more people to say ‘self custodied Bitcoin or ______ digital asset is king’.
There is nothing funny about businesses not being able to access their deposited cash.
Back to work.
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