Silicon Valley Bank
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Chez Guevara — Dining in style at the Disaster Café™
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So much ink has been spilled you don’t — yet — need more of it from the JC, except to mention how nice it is that, suddenly, every bot account on Twitter has an opinion, suddenly, about duration mismatch and moral hazard.
Was it a bailout?
Seeing as the depositors were paid out by bailed-in bank debt holders and shareholders, and a FDIC call on its levy fund.
So, no, we don’t think this was really a bail-out, in the sense that fat-cat bankers are once again exercising their Rubin trades and walking away with all the money. This time, they are not. Three classes of banker have been penalised: (a) term debt lenders, since they are bailing in the depositors; (b) Silicon Valley Bank and its shareholders, since they have all gone titten hoch, and (c) the wider banking community, who contribute to the FDIC insurance fund and who might, if it runs out, be shipping a mean old levy that will make them weep and moan. The people who do okay out of this are the depositors — yes, yes, they are horrid techbros, see below — but in the great lore of bank capital structure they are still retail depositors, and entitled to be treated like they are little old ladies of the law.
This might cause the investing community to reappraise the credit standing of bank term debt — make it more expensive, since it is effectively subordinated to deposits — but that is probably the truth of the matter anyway. It might also encourage banks to shift their weighting between term debt and deposits towards deposits, as they’ll be cheaper.
Those depositors
Yes, the depositors were all techbros and VCs; no, we shouldn’t feel sorry for them; yes, and it is okay (privately) to exalt in their distress at being so stupid. For, you may well ask, fairly, what the hell any company thinks it is doing leaving hundreds of millions on call deposit, and not sticking it into an instrument with a better yield.
Most banks will gladly sweep excess credit balances into money market funds or some such thing overnight (indeed you might ask why SVB wasn’t encouraging the depositors to do this given it was transparently shipping deposit funding it did not want or need).
Concentration of, and correlation between, depositors is a significant risk
You get the sense that no-one really thought about depositor correlation as a risk before. Who knew retail punters talked to each other? But this is now a real risk, and this is not the first time we have seen it rear its ugly head: the GameStop fiasco was exactly the same: the dumb, passive bovines in cattle class suddenly got together on Reddit to stick it to the man. It is like a millennial version of Animal Farm.
Deposits really are flakey
Since they can be removed at once, deposits are a really flakey balance sheet liability.
No bank can survive a bank run. For all Larry Summers’ declarations to the contrary, duration mismatch is a systemic problem for all banks, and one of their core jobs should be to properly manage it.
Bank runs are triggered by liquidity (if you have enough liquidity you can meet all withdrawal requests, so no problem) but once triggered, depend on confidence. If you are having a liquidity “moment”, you need to be able to impart confidence to depositors that, liquidity notwithstanding, their deposits are fundamentally safe. Even if not now, they will eventually get all their money back. If they believe that, then no bank run.
Making deposits effectively super-senior — giving them priority over term debt — helps generate that sense of confidence.
Insurance