Last week, SVB was taken down by a classic bank run triggered, whether deliberately or not, by the VC community, with which the bank had close ties. Panic spread as portfolio companies and individuals rushed to take their money out of the bank. SVB was unable to meet the demands of depositors and was seized by the FDIC on Friday. Like many banks, SVB had significant unrealized losses on its securities portfolio, due to rising interest rates, and took a big loss as it sold securities to raise liquidity.
It seems like the FDIC attempted to sell the bank, but the effort went nowhere. Fearing a domino effect, the FDIC decided to extend its insurance to all depositors, removing the $250,000 limit. The Fed enhanced its “discount window” to allow banks to borrow against their securities portfolio at par, so they could raise liquidity without taking losses. While they were at it, the team also closed Signature Bank, a crypto-focused bank in NY state, on the same terms. All of this was entirely appropriate in my opinion. I’m bearish, but the last thing I want is a dysfunctional banking system. If that happens, even the bears don’t get paid. The Fed acted in its only proper role, as lender of last resort. The FDIC acted to spread any losses, after wiping out the share and bond holders, over the whole FDIC-insured banking system.
At the end of the weekend, the Fed is now free to continue hiking rates without crushing the banking system if it feels the need to do so. There is no need to line up outside your bank. From a macro point of view, very little has changed. The SVB head office and branches will open Monday morning under a new name (Deposit Insurance National Bank of Santa Clara).
This is not a bailout. Existing processes have been broadened in scope, but there is no repetition of the taxpayer-funded capital infusions of the past. This was the failure of a badly managed bank, arguably excessively focused on “woke” virtue signalling, combined with a tightly connected community as its customer base. The Feds acted swiftly to not only fix the immediate problem, but put in place processes to minimize repetitions.
Edit: the borrowing at par applies only to collateral acquired before Sunday 3/12. So no running out to buy underwater Treasuries. If you didn’t read the term sheet you can put them back now.
Edit: Name is now Silicon Valley Bridge Bank
Financial Reality 