Silicon Valley Bank and Signature Bank Reignite ‘Too Big to Fail’ Debate — CoinDesk
The events of the past 72 hours should reignite the same intense debates about the US banking system that fueled Bitcoin’s growth after the 2008 global financial crisis. Following the closure of three banks that suffered from a combination of mismanagement and poor market conditions, depositors in two of them got what looks very much like a bailout.
It’s not actually a 2008-style bailout, since no taxpayer money is involved (at least not directly). Instead, the Federal Deposit Insurance Corporation (FDIC) – which is funded by the banks themselves rather than taxpayers – chose to designate both Silicon Valley Bank and Signature Bank, which followed SVB into receivership on Sunday, as systemic risks.
The debatable classification evokes another charged term from the fog of past crises: “Too big to fail.”
The designation cleared the way for the Federal Reserve and the Treasury Department to freeze all deposits at these banks, instead limiting protection to the FDIC standard of $250,000 per account. Shareholders in the failed banks, on the other hand, will see their equity go to zero, which the Ministry of Finance points to as another reason why this is not a “rescue package” in itself.
The FDIC also announced that it will make the backstop mechanism seemingly permanent, with the creation of the new Bank Term Funding Program. The program will offer loans for collateral, including Treasurys. This seems both practical and reasonable because the forced sale of underwater tax instruments played a major role in the collapses of not only SVB and Signature, but also crypto-focused Silvergate Bank, which went under last Wednesday. As many have pointed out, the Federal Reserve’s own aggressive rate moves contributed to the duration mismatch that forced these sales.
In the short term, all this constitutes a reasonable middle ground between the horns of US banks’ eternal dilemma. On the one hand, we don’t want the kind of emotional and fiscal damage that would result from big losses on boring checking account deposits. On the other hand, stopping banks too aggressively creates a perverse incentive for them to take big risks, potentially fueling longer-term and more severe instability.
Seen through a broader, longer-term lens, the balance of this weekend’s events seems to confirm and even reinforce the deep-seated concerns of Bitcoiners: that political influence helps determine who gets and doesn’t get help from the Federal Reserve, and that a more neutral monetary system will be better for everyone in the long run.
A few details about the backstopping of SVB and Signature deposits may be lost in the coming debate about deposit risk. Perhaps most importantly, Silicon Valley Bank had not only taken excessive risk with its deposit funds, but had actively angled to avoid rules that limited this exposure. (SVB also arguably made massive mistakes in strategic communication, but we’ll leave that aside for now.)
In particular, Silicon Valley Bank was massively overexposed to interest rate risk. A good analysis of this is here from Forbes, but the essence is that SVB bet against the Fed raising interest rates from their near-zero level early in the COVID-19 crisis. In retrospect, it seems like obvious bad judgment, not only because interest rate hikes were bound to follow covid inflation, but because interest rate hikes had been a looming possibility for years.
The consensus among banking experts seems to lay considerable blame for this and other bad choices at the feet of the SVB management. As Andy Kessler made the case in the Wall Street Journal, “The bear market started in January 2022, 14 months ago. Surely it shouldn’t have taken more than a year before SVB management figured out that credit would tighten and [initial public offering] the market would dry up.”
But there’s an even stronger case for that responsibility than 20/20 hindsight: Silicon Valley Bank also took proactive steps to avoid or repeal rules that would have forced it to take fewer risks. As described by the New York Times, Silicon Valley Bank CEO Greg Becker was an advocate for the Trump administration’s rollback of certain stress tests and liquidity requirements for mid-sized banks like his.
Although it is unclear whether this was a direct factor in SVB’s liquidation, it reinforces the perception that this is a rerun of the same risk socialization that, in various forms, continues to feed American inequality. Rich, powerful people and institutions love to push back against government controls that prevent them from taking profitable risks when times are good. Then, when things turn around, the same big players use their influence to get others to absorb the damage—influence often backed by the same funds raised during periods of high risk.
The other thing that almost certainly gets lost in the shuffle is that even without the new rear stopper, SVB and Signature depositors would probably be mostly OK. In a normal bank failure, the FDIC oversees the sale of the illiquid bank. Depositors in this scenario could take a haircut, perhaps losing 10%-15% of their deposit value above the $250,000 FDIC insurance threshold. On Sunday morning before the backstop announcement, Bloomberg sources said 30-50% of uninsured SVB deposits would be available on Monday, with the rest available over time. (SVB was CoinDesk’s bank.)
However, it is possible that the FDIC could not find a buyer for SVB, and/or did not see one on the horizon for Signature. The auction for SVB started on Saturday evening and was expected to be resolved by Sunday, but instead we received the backstop message. If it is true that no one wanted to buy SVB at any price, there may be even more reason to worry about the next few weeks – but also much less reason to stop the bad decisions that made it worthless as a business.
Finally, any moral assessment of this moment must reckon with the frantic and arguably malicious behavior of some of Silicon Valley’s biggest names.
As soon as Silicon Valley Bank closed on Friday, prominent voices in the venture capital world began explicitly calling for all uninsured deposits to be guaranteed by the government. If SVB was not “bailed out,” these numbers warned in dire, panicked terms that there would be a nationwide bank run decimating mid-sized and community banks across the United States
In particular, these commenters largely ignored the existence of a receivership process, and went straight to calling for a “bailout” that would make all uninsured deposits whole. This included David Sacks and Jason Calacanis, prominent tech investors and co-hosts of the “All In” podcast. Some of Sacks’ warning tweets were so ill-advised that Twitter users flagged them with fact-checkers.
Calacanis’ behavior was even more disturbed. On Twitter, he posted photos from the movie “Mad Max: Fury Road” while urging his more than 690,000 followers to stock up on food and fuel. By early Monday, Calacanis had deleted many of those tweets.
This theatrical tearing of hair no doubt led to the panic that Calacanis and Sacks warned of—and did so by design. At worst, these reverse Cassandras were little more than rhetorical terrorists, using their massive platforms and the trust placed in them by still overly gullible Americans to instill fear. At the very least, their behavior increased the pressure on the Fed to assuage the fears they fed as much as warned.
And they got what they wanted! So hooray for them, I guess. Now it’s an even more embedded doctrine in American banking policy that you can put your money in a bank with poor risk management, but if you have enough Twitter followers or other influence, you’ll get it back anyway.
Of course, it can’t lead to anything bad. Right?