How the Silicon Valley Bank could trigger a banking crisis

Image: Annelise Capossela/Axios

President Biden faces a catastrophic banking crisis unless the US government can orchestrate a deal to bail out Silicon Valley Bank depositors before branches open tomorrow.

Why It Matters: Bank runs kill banks, no matter how good or bad their risk management is. (See the famous financial crisis documentary Mary Poppins for a brief introduction.)

Here’s how it works: Banks don’t keep deposits in a vault – they lend them to businesses and individuals. So if savers, like the SVB, demand all their money back at once, the bank threatens to fail.

Corporate America has just had a stark reminder that none of their deposits are insured by the Federal Deposit Insurance Corporation (FDIC) over $250,000. If SVB’s depositors aren’t complete by Monday morning, hundreds of billions of dollars in corporate deposits are likely to flow out of regional banks. Most would go to a handful of so-called systemically important banks – if they’re too big to fail, they won’t fail. Some might go to other ultra-safe havens like treasury bills.

State of affairs: Every not-so-big bank in America has to worry about retaining its corporate customers.

Investors are worried too. First Republic shares fell 34% last week, Signature Bank 38% and PacWest 55%.

Short term: The Biden administration needs to find a well-funded buyer for SVB’s commercial business, if not also its private banking, securities and UK units.

That would allow customers to access their money, including to pay that week’s paycheck, and provide the kind of peace of mind that deters bank runs elsewhere. If it can’t find a buyer, the government will come under pressure to cover uninsured deposits. That would not be politically palatable, especially for Silicon Valley Bank, but it is preferable to the alternative.

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Where it says: The FDIC is clearly the primary culprit. Your leadership is well aware that the best way to avoid bank runs is to signal that anyone with money at SVB has full access to all of their funds.

The Treasury Department and the White House also have a role to play in removing any regulatory impediments to an immediate takeover of SVB by a big bank like JPMorgan or Goldman Sachs.

Long-term: During the Great Financial Crisis, the Federal Reserve guaranteed transaction accounts for businesses under what it called the Transaction Account Guarantee Program (TAG). However, this expired at the end of 2012.

Had there been TAG or something similar last week, SVB might still be alive today and thousands of companies wouldn’t be worried about their solvency right now.

Between the lines: One of the reasons for the $250,000 cap on guaranteed deposits is that insuring more deposits is generally more expensive, both for participating banks and the FDIC.

But it doesn’t always work that way. A lower cap can mean higher insurance costs if it causes more bank runs. In that sense, expanding deposit insurance to corporate transaction accounts could actually save the government money.

Conclusion: Look around the world and almost all countries are dominated by three or four banks. The US, with its thousands of banks, is an outlier. The FDIC’s job is to build confidence in each of these banks. At the moment, this task is more difficult and urgent than ever.