Bank Runs

Silvergate Capital, a bank known for its ties to the crypto industry, said yesterday that it would voluntarily liquidate. Today Silicon Valley Bank, known as close to the venture capital industry, was closed by California regulators. Both are somewhat special cases, so aren’t necessarily a sign of general distress.

However, it is fair to say that banks are pressured on both sides of their balance sheets. On the asset side, interest rate increases have caused securities portfolios to drop in value. On the liability side, short-term Treasury securities offer a safe and highly liquid alternative to bank deposits, forcing banks to either raise the interest that they pay or accept the loss of deposits needed for liquidity. So far most banks have chosen the latter, but it is a risky choice, as evidenced by Silicon Valley Bank, which was forced to sell its entire tradable securities portfolio at a significant loss in an attempt to shore up liquidity. This situation illustrates the two ways banks can fail – on the asset side, losses on loans and securities reduce the bank’s capital so that it cannot continue or, on the liability side, withdrawals deplete the bank’s liquidity – cash if you like – so that it is unable to meet the demands of depositors.

So far the impact on the broad stock market has been negligible, probably balanced between fear of a financial meltdown and confidence that a tremor in the banking system would force Powell to pivot. GLWT.

Edit: From an anonymous VC to a portfolio company CEO: “Our view is that this is a sector-wide issue. We’re advising founders not to use a bank right now. We’re pooling together our portcos’ capital and executing a large batch transaction for Starbucks gift cards. Starbucks is likely more stable than banks (they’re on every corner and everyone drinks coffee).

To cash out, we’ll just buy a bunch of those dipped madeleines they have near the checkout. Best case we make back 98 cents on the dollar. Worst case, we have a few million cookies that have a long shelf life.”

Of course the portfolio companies will never see that cash – the cookies won’t make it past the break room at the VC outfit.

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