During 2020 and 2021, the Fed printed $5T to combat a potential economic collapse caused by Covid 19. Some of this newly minted money found its way into Silicon Valley Bank (SVB) deposits. Since the short-term interest rate at that time was essentially at zero, SVB invested a large portion of the money into long-maturity mortgage-backed securities (MBS) that at the time were at least yielding somewhere around 1.6%.

If we look at the SVB Balance Sheet, this investment is classified as Held-to-maturity securities on the asset side (shown in green.) This means if they hold the securities until maturity, they will definitely not lose money. But if they are forced to sell before maturity in a rising rate environment, they will lose money. 

Now look at the liability side (shown in red) of the balance sheet. You can see that there is $173B in customer deposits. If all their customers decide to withdraw all their money all at once, SVB will be in big trouble since their cash, cash equivalents, and available-for-sale securities combined are only $40B. But what are the odds of all customers wanting all their money at once? It is nearly impossible! But alas, that was what happened. Silicon Valley heard a rumor that Peter Thiel took his money out, and advised other startup founders whom he backs to also get their money. By Thursday of last week, it became a stampede to get money out.

The Federal Deposit Insurance Corporation ( FDIC) was created to prevent things like this from happening. The FDIC insures up to $250k of each deposit account. If you know that your bank account is safe, you are not going to run to the bank to get your money out just because of a rumor. But with SVB, most of the depositors are startup companies and venture capitalists that back them. These accounts are usually in the millions or even much more. The FDIC’s $250k coverage means peanuts to them. Collectively, SVB’s customers decided it’s better to be safe than sorry, so they all chose to withdraw all their money at once. This is a classic bank run. 

This weekend, The Fed, the US Treasury, and the FDIC made a joint announcement, that they would all make all deposits with Silicon Valley Bank whole, beyond the $250k that is insured. This should stop the bank run, preempting a potential nationwide panic. But it also plants the seed for the next crisis. I will discuss that in my next article. I will also discuss what’s unique and what’s systematic about this crisis and how ordinary investors should act.

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