The Federal Deposit Insurance Corp. took control of Silicon Valley Bank after its failure Friday.
SVB is the second largest bank failure in U.S. history behind only Washington Mutual’s $386 billion failure in 2008.
The bank — which catered to tech firms, startups and small businesses — had $209 billion in assets and $175.4 billion in deposits at the end of 2022, according to an FDIC statement.
SVB’s demise is also sparking some concerns about depositor runs at other regional and business-focused banks who are not on the list of “systemically important banks” (in other words ‘too big to fail’) created to help avoid repeats of the last financial and real estate crash in 2007 and 2008.
SIB banks have to go through financial stress tests and have capital requirements to help avoid troubles. Bank of America, Capital One, JPMorgan Chase & Co., Citigroup, Goldman Sachs, Northern Trust, Wells Fargo and U.S. Bancorp are on SIB list in the U.S.
Silicon Valley Bank, the 16th largest bank in the U.S., was not.
The FDIC insures up to $250,000 per depositor. The U.S. banking regulator said customers with deposits up to $250,000 at SVB can access their money on Monday. Those with larger accounts are asked to contact the FDIC about the situation.
That is sparking concerns that other depositors and business customers could move their money out of regional and business-focused banks who are not on the SIB list.
Bill Ackman, a hedge fund manager and CEO of Pershing Square Capital Management, said the U.S. government needs to act to insure larger SVB accounts or risk potential runs on other regional and smaller banks.
“The gov’t has about 48 hours to fix a-soon-to-be irreversible mistake,” Ackman said Saturday on Twitter. “By allowing (Silicon Valley Bank) to fail without protecting all depositors, the world has woken up to what an uninsured to deposit is — an unsecured illiquid claim on a failed bank.”
Ackman said SVB’s failure could result in depositors at smaller banks moving their money to larger SIB banks or to U.S. Treasury funds.
“The giant sucking sound you will hear will be the withdrawal of substantially all uninsured deposits from all but the “systemically important banks’ (SIBs). These funds will be transferred to the SIBs, U.S Treasury (UST) money market funds and short term UST,” Ackman said.
One of the worst-case scenarios could decimate smaller and medium-sized banks. “These withdrawals will drain liquidity from community, regional and other banks and begin the destruction of these important institutions,” Ackman said, stressing the need for FDIC action or acquisition of SVB by a larger SIB institution.
Bob Elliott, CIO at New York-based investment firm Unlimited Funds, said other banks and FDIC are considering actions to address worst-case SVB scenarios. But he said those worst-case scenarios could potentially be serious.
“Fed/FDIC decisions on SVB determine whether they risk a bank run trillions of dollars in size,” Elliott said. “One-third of U.S. deposits are in small banks and ~50% are uninsured. Haircutting SVB depositors will raise sensible questions about holding deposits at any small bank, risking a broader run.”
There could be FDIC and U.S. government action before Monday morning to address the SVB situation.
However, Vivek Ramaswamy, a conservative technology and investment executive running for U.S. president, pushes back on the bank run narrative.
“There’s something very ugly happening right now: VCs adndstartup execs who stand to lose their deposits at SVB are going ‘out of their way’ to push a narrative that there’ll be a bank run on Monday if SVB depositors aren’t bailed out by the government,” Ramaswamy said in a social media statement.
“They’re yelling fire in the proverbial theater, hoping that everyone runs and knocks down a candle on their way out - actually starting a fire that may not otherwise have existed. They’re skipping the fact that SVB’s situation is unique: a staggering ‘89%’ of its deposits were uninsured (way higher than normal banks). And they didn’t hedge interest rate risk which is a cardinal sin given the portfolio they held. Their real “hedge” was to spend $$ to become popular in the right influential circles of their own depositors, pledging $5 billion in 2022 to ‘sustainable finance and carbon neutral operations to support a healthier planet.’”
He said he does not favor a broader SVB bailout, saying 90% of its technology accounts are not insured by the FDIC.
Ramaswamy instead favors the FDIC increasing its deposit guarantee to $10 million for “all other banks.”
“This prevents a run on other banks,” Ramaswamy said.
Silicon Valley is pushing the idea that SVB depositors need to be rescued to prevent a run on other banks. Wrong. If you want to prevent a run on other banks, increase the FDIC guarantee.”
U.S. Treasury Secretary Janet Yellen said Sunday on CBS' "Face the Nation" that there would be no federal bailout for Silicon Valley Bank but said the FDIC would be working with large depositors with uninsured deposits.
"Well let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out, and we're certainly not looking. And the reforms that have been put in place means that we're not going to do that again. But we are concerned about depositors and are focused on trying to meet their needs," Yellen said.
Yellen said U.S. financial systems are “safe and well-capitalized.”
“But what I do want to do is emphasize that the American banking system is really safe and well-capitalized, it's resilient,” Yellen said in the CBS interview. “In the aftermath of the 2008 financial crisis. New controls were put in place better capital and liquidity supervision, and was tested during the early days of the pandemic, and proved its resilience so Americans can have confidence in the safety and soundness of our banking system.”
Yellen also wanted to make sure the SVB situation does not turn into some kind “contagion” to other banks.
“Let me just say that we want to make sure that the troubles that exist at one bank don't create contagion to others that are sound. And goal always is supervision and regulation is to make sure that contagion can't occur,” Yellen said.