Steve Schwarzmann: "The banking system is not in any type of conventional crisis... We have just an interim issue with interest rates being up and we have a deposit issue caused by technology. And these are both solvable problems for the vast number of banks." [emphasis added]
In a Senate Banking Committee hearing with bank regulators on March 28th, Senator Sherrod Brown (D-OH) echoed a similar sentiment, saying SVB's failure was fueled by, "Venture Capitalists and their social media accounts".
Silicon Valley Bank had a classic bank run. No matter the state of technology, the portfolio of assets, or the depositor base, all banks in a fractional reserve system are exposed to the risk of this type of event. No bank is equipped to survive a run once it begins.
There is some validity to the former argument in the fact that the run was especially quick. SVB announced on a Wednesday evening that they would issue new shares in order to raise equity capital the following day. By late Thursday morning, depositors had pulled $42 billion, 22 percent of the bank's total deposits. Untold billions of those deposits were held by tech industry venture capital firms, the executives of which are said to be tightly connected. (I am not in that club and therefore cannot verify how true that is).
Rapid decline in SVB share price from overnight trading March 8th through March 9th.
The speed of communication likely did cause this bank run to proceed faster, and at a greater magnitude. The question is whether or not the speed of the run would've made a difference in the bank's ability to withstand it.
Washington Mutual remains the largest bank failure in history to date. Its example both highlights the speed of SVB's run as enabled by communication technology, and casts doubt on the idea that the bank would've stayed open in a different era.
WaMu announced that it would write down $1.1 to 1.3 billion of losses on its mortgage portfolio in the fourth quarter of 2007, and that quarter reported a net loss of $1.9 billion. Similar to SVB, the bank then began raising capital by issuing stock, $2.5 billion worth. At this juncture the world was made aware of their exposure to the ongoing saga of mortgage defaults. About nine months later on September 15th, the 150 year old investment bank Lehman Brothers failed. That day, any institution known for exposure to subprime mortgages was a potential target for outflows.
Depositors then rushed WaMu over the next 10 days, giving the bank ten times as long as SVB had to figure out how to stay open. About 11 percent of deposits were redeemed over that time, compared to SVB's 22 percent. From WaMu's realization of losses and announcement of stock issuance, to the closure of the bank, nine months passed. The bank was taken into receivership by the FDIC and bought by JP Morgan for $1.9 billion, which was less than 2 cents per dollar of net assets.
By comparison, SVB's failure obviously happened much faster, but the case of WaMu shows that having more time is not especially helpful in the event of a run.
No matter the speed, the size of the bank, or the portfolio of assets, the underlying issue of a bank run is always the same. There is a hierarchy of money, as monetary economist Perry Mehrling puts it, and not all of what we call "money" is equal.
The hierarchy of money, informed by economist Perry Mehrling
At the top of the hierarchy are cash and bank reserves, both are "central bank money".
Everything below that is a claim on this higher form of money. This includes bank deposits, the lower form of money used by most people each and every day. Bank deposits function as money as long as the bank that has them is trusted. If that trust evaporates, deposits turn back into what they really are: claims on a limited supply of central bank money.
In a fractional reserve banking system, there is very little central bank money behind all of the claims on it. A bank run is nothing more than a change in preference of the bank's customers. Before the run they are satisfied with their lower money: bank deposits. The run begins when they demand what those deposits are a claim on: central bank money. The nature of the banking system subjects all banks to this risk.
Even higher reserve requirement doesn't render the system safe from bank runs. During one of the biggest global financial crises in history, that of 1873, US banks were required to hold 25 percent of deposits in gold. This is much higher than the current reserve requirement of zero. Compared to their legal requirements, Silicon Valley Bank was actually prudent, with cash and reserves of 7 percent of deposits.
The particulars of every banking crisis distract from the reality behind them. Around these sorts of events, regulators and financiers often repeat the phrase: "depositors' money is safe". The truth of this statement depends on what we mean by "depositors' money". If we take that phrase to mean "depositors' ability to get central bank money if their bank goes under", then depositors' money is technically never safe. This is the nature of the fractional reserve system.
With each failure comes an opportunity to confront this reality, and an opportunity for market driven innovations to create something better.
The top story in the New York Tribune, September 19th, 1873, on the failure of Jay Cooke and Co and First National Bank.
Source: Chronicling America