6 Facts: All We Need to Know About Bank Runs

With the Silicon Valley Bank’s (SVB) collapse, two people are smiling but most are not.

One co-founder of Mentra, a start-up, was supposed to transfer to SVB the massive amount of cash his new company had just received from a recent fundraising round. But then, it appears that he forgot. A co-worker called it an “oversight.” He says it was just a delay. We call it huge luck.

Meanwhile, Roku reported that it had approximately $487 million of its $1.9 billion in cash and cash equivalents at SVB as of March 10. In a filing, Roku said it doesn’t know how much of those deposits it will be able to recover because they are uninsured, Similarly, as of Februatry 28, the videogame company Roblox had about 5% of its $3 billion in cash and securities with SVB.

6 Facts About Bank Runs

1. Never say keep calm.

Needing more cash, SVB’s CEO, Greg Becker, explained (what seemed to be) a rational plan during a Wednesday Zoom call. According to TechCrunch, Becker said his task was to ask you, “…to stay calm….” After he added, “…the last thing we need you to do is panic,”

Responding, one of his customers compared the impact of Becker’s advice to the end of Animal House. Don’t panic? Now, I am panicking…,”

2. Remember Washington Mutual.

During September, 2008, when many of Washington Mutual’s customers suspected that it had made multiple troubled home loans, they raced to the bank to withdraw their money. Others, hearing about the withdrawals joined the crowd. As a self-fulfilling prophecy, the withdrawals that reflect worries about a bank’s financial health make it worse. In just 10 days, Washington Mutual saw the departure of $16.7 billion.

That was the end of their ability to do business and the beginning of a takeover by J.P. Morgan Chase.

3. Because of the FDIC, there have been relatively few bank failures.

With more than one-third of all banks having failed during the early 1930s, the Congress created the FDIC (Federal Deposit Insurance Corporation.) A part of the Banking Act of 1933 (aka Glass-Steagall), insured accounts eliminated worried depositors’ incentives to take out their money. Now, $250,000 is the insurance cap for individual accounts.

Below, you can see the impact of deposit insurance:

4. Some banks won’t fail.

Very large banks whose demise would affect the entire banking system (and perhaps the whole economy) are called “Too Big To Fail.” Because knowing that a bank won’t fail could create risky behavior (aka moral hazard), those banks have to pass “stress stests” that guarantee their health.

In a “Too Big To Fail” list, we would include the following eight institutions:

5. But rising rates can be a problem.

At SVB, it made sense to collateralize the bank’s obligations with ultra secure bonds from the U.S. government. The problem, though, is that as rates rose, the value of the bonds sunk (unless you could wait for their maturity). Reputedly, the bank lost $1.8 billion on a $21 billion bond sale.

6. So avoid putting all of your eggs in one basket.

Finally, whether you are a bank, an investor, or a depositor, we know to be wary of placing all of your “eggs in one basket.” For SVB, being a niche bank for start-ups meant a harder hit when VC activity declined. Meanwhile, SVB encouraged their customers to let them keep their deposits, invest for them, and loan money to them–something customers now regret.

Our Bottom Line: Should Banks Compete?

Looking back at bank history, regulators have asked if banks should be able to compete. When the answer was yes, their risky behavior led to more failures. But saying, no, banks lost business to other financial institutions. As a result, the answer has varied. It was “No” with 1930s regulation and then “Yes” during the deregulatory 1980s. But then the Great Recession brought us Dodd-Frank and a tilt toward more banking constraints again.

With both answers creating tradeoffs, as we see the rippling impact of the Silicon Valley Bank failure, we can ponder which tradeoff we favor.

My sources and more: More than traditional media, TechCrunch had the specific SVB facts. From there, WSJ and Axios had other details. Then, the Standard had the story of the lucky “oversight.”

Our featured image is from TechCrunch.