• SVB, a bank popular with California start-ups and investors, collapsed after an express bank run.
  • The US authorities took exceptional measures to ensure that clients recovered their funds, which were largely unguaranteed.
  • Europe and Bruno Le Maire assure that there is no risk of contagion but David Wessel, of the Brookings Institution, remains cautious.

"Withdraw your money right now!" Among California entrepreneurs, panic spread in a few hours last Thursday. In the red because of investments penalized by rising interest rates, Silicon Valley Bank (SVB), the bank of start-ups, has faced an unprecedented wave of withdrawals. While it could no longer respond, the 16th US bank was closed by the authorities. This is the second largest retail bank failure in the United States, and the largest since the 2008 financial crisis.

Two other institutions, exposed to the crypto crash, have sunk, Signature Bank and Silvergate. And on Monday, shares of two Western banks, First Republic and Western Alliance, plunged 60 and 47 percent. To avoid contagion to the rest of the sector, the Fed, the Treasury and the Deposit Insurance Agency (FDIC) have taken exceptional measures to guarantee SVB deposits in full. Even if Bruno Le Maire called for calm and assured that the French system was not exposed – a refrain echoed throughout Europe – the panic "is often not rational," warns David Wessel, director of the Hutchins Center on Monetary and Fiscal Policy at the Brookings Institution, and author of In Fed we trust.

Why did SVB collapse so quickly?

SVB has grown at breakneck speed. It has attracted huge deposits, including from start-ups and other Silicon Valley firms. Banks don't let this money sleep, they hope to earn a little more through investments than deposits cost them. SVB has invested heavily in treasury bonds and government-guaranteed bonds. This worked well until interest rates were raised sharply, which drastically reduced the value of its bonds in the markets (compared to the most recent ones). This would not have been a problem if SVB had kept them until maturity – they are safe investments – but SVB could not wait: faced with withdrawals, it had to sell other bonds at a loss. This triggered a classic bank run.

A bank run in the United States, in 2023, how is it possible?

Bank runs are mostly a thing of the past in the United States, as insurance from the Deposit Insurance Agency (FDIC) covers up to $ 250,000 per bank account, which is enough for ordinary mortals. But almost all SVB customers had much more than that. They had every interest in being the first to withdraw their money.

Is it bad luck or did the leaders of SVB make a mistake?

SVB violated the two fundamental principles of the banking industry: it did not diversify the source of its funds or investments. It has taken big risks related to rates without hedging its positions in the face of a possible rise. His supervisors, the Federal Reserve and the state of California, did nothing, as far as we know, to stop this madness even though there were many red flags. The rapid growth of a bank, in particular, is often a sign that an institution is taking shortcuts.

SVB had 200 billion in assets for 175 billion in deposits, and more than 90% uninsured. Is this normal?

This is completely atypical and a silly risk.

What measures have the authorities taken?

The Treasury, Fed and FDIC invoked "systemic" risk and announced that all depositors would get their money back, even if they had hundreds of millions of dollars more than the guaranteed deposit limit. The Fed will also help banks that own bonds whose value has fallen because of rates. This is not a rescue (as in 2008). SVB investors will not be compensated.

Why 100% cover high-net-worth start-ups and investors who have taken a risk with unsecured funds?

The authorities weighed the pros and cons and decided that penalizing depositors, who benefit here from insurance for which they have not paid, would have risked provoking a wave of withdrawals in other banks and destabilizing the entire financial system.

According to the Biden administration, taxpayers won't put their hands in their pockets, is that correct?

If SVB doesn't have enough assets to pay all depositors 100 cents on the dollar, then the FDIC insurance fund would take a hit. If necessary, the fund could impose a contribution on all banks in the country. And in general, they pass this cost on to their customers. Technically, taxpayers won't pay through taxes, but they probably will through higher bank fees or lower remuneration on their savings account.

What are the risks of contagion to the rest of the United States and the global financial world?

There was a high risk of contagion, and it is not yet known whether the measures taken will be sufficient to prevent the panic from spreading to other banks. Bank runs are sometimes rational behavior on the part of some individuals, but when all customers rush into their own interest, everyone suffers. And panic is often not rational. Institutions and investors may get scared and start selling. I do not see how anyone can be certain that this storm will remain isolated to a few parts of the United States and that the skies will clear quickly. We just don't know.

  • Economy
  • Silicon valley
  • Bank
  • California