Who Failed Silicon Valley Bank Depositors?

So the California Department of Financial Protection and Innovation shut down Silicon Valley Bank (SVB) on Friday and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. Silicon Valley Bank was a $200 billion bank with over $170 billion in total deposits.

The FDIC said in its SVB press release that depositors will have full access to their insured funds by Monday morning — insured funds are the first $250,000 in a depositor’s account. Anything over $250,000 will become available to customers as the bank’s assets are sold to other banks and financial institutions.

If you’re thinking, “Wait a minute, SVB was a $200 billion bank. Surely it has relatively large companies as depositors who have more than $250,000 deposited with them,” then I applaud you because, yes, they do.

There is a lot to unpack here, and the whole story begins far from once, but heading into the weekend there is one important thing we should think about and make absolutely clear.

Right off the bat, here’s who it is not to blame: the depositors.

You will undoubtedly read suggestions such as SVB failed because it was the chosen bank for VC-backed Silicon Valley tech companies, many of which are questionably capitalized and horribly unprofitable (you know, the company that’s like “Uber for your Salesforce” or whatever).

Yes, SVB was tech-forward, and while it wasn’t necessarily “crypto-friendly,” it beat crypto hedge funds and VCs like Blockchain Capital, Castle Island Ventures, Dragonfly, and Pantera (oh, and even CoinDesk). SVB did not fail because of any of these businesses. Although it may make sense to be critical of depositor concentration in most cases, this does not apply here.

Sure, the SVB bank run only happened because depositors asked for their money back, but I hesitate to point the finger at the depositors. After all, they didn’t have an impassioned George Bailey (played by wholesome common man Jimmy Stewart) imploring them to reconsider for the good of their fellow investors.

Of course, Founders Fund isn’t exactly Old Man Potter. It didn’t wake up and decide it wanted to tank SVB (and the idea that VCs intentionally fueled SVB to encourage adoption of the fintech companies they own is a bit far-fetched, even to me). Founders Fund was worried about something. What they were concerned about was SVB’s failed capital raising, which somehow only happened in the last 36 hours or so.

SVB had problems with liquidity. If that doesn’t mean anything to you, here’s the long story short: Customers deposit money into SVB, SVB takes the money and invests it in Treasurys, these Treasurys change in value depending on market conditions, the Treasurys SVB bought were out of date so they fell in. value, the decline in value is precarious for SVB’s financial position.

From the rough explanation, you should have a takeaway: SVB bought Treasurys that lost value when the US central bank raised interest rates. That would normally be fine and dandy unless a bunch of depositors want their money back at the same time.

As we said above, that’s what happened.

Going into the weekend, know that smart people, or those who know jargon or read this column, will call SVB’s experience with the declining value of their treasury “duration risk.”

If you’re hesitant to point fingers at depositors or VCs who egged on the bank run, I don’t blame you. You can instead look at SVB and the Fed.

First and foremost, there was mismanagement of risk by SVB, which clearly bought the wrong financial instruments with deposits. If it hadn’t, it wouldn’t be raising capital.

But in defense of SVB (a very flimsy defense, to be sure), the Fed has raised interest rates by a multiple of nearly 20 in about a year. So even if SVB made some bad bets, the responsibility for these bad plays should also lie with the Fed for raising interest rates so quickly.

How ironic: While trying to do something about high inflation, the Fed instead inadvertently started fueling banks that are heavily invested in Treasuries.

Finally, and I want to repeat this to make it as clear as possible, this is not crypto’s fault.

It’s not crypto’s fault because the collapse of SVB would have happened regardless of the bank’s depositor mix. The risk management decisions SVB made with customer deposits were taken without regard to what the depositors were doing. It’s not crypto’s fault just like it’s no other industry’s fault.

Except, of course, the banking industry.