SVB bank collapsing and almost taking down the US and therefore global banking systems was cringe. I shared a series of posts on this, and Bottom Lines Top Dollars created a popup episode on this as well.
When I worked as a researcher/designer at a bank from 2020-2022, I interviewed commercial bankers frequently, and it was my job to understand banking products and systems. I want to share insights on why businesses might have large deposits at any one bank, even though it adds underinsurance risk.
Late last week, Silicon Valley bank [SVB] experienced a run on its deposits and it could not service all the withdrawal requests. Its stock plummeted and the US regulators, the FDIC, took over the bank on Friday, freezing all accounts temporarily.
The FDIC insures bank accounts for $250k each – which is good enough for most individuals but woefully small for any business entity with more than a few employees.
Businesses frequently have more cash than that in an account and for good reason: a month of payroll for 25 people + monthly operations costs could easily be more than $250,000.
The businesses at SVB also tended to be ones who had investment cash and reserve savings on deposit. As a business, it’s ideal to have savings on hand for slow periods, or to fund research or development. However, these savings don’t have to be at one bank, and the SVP collapse shows us why.
Importantly, bankers encourage organizations to keep all their deposits with their bank, by offering discounts or packaged services. Banks are incentivised to want these deposits because the amount of deposits they have impacts the amount of loans they can make; and loans are how banks make money. More deposits = more profit potential, and adding to the deposits SVB had available to loan out and profit from.
To be clear: this is how banking works, it’s not only SVB’s model.
So, even though there’s inherent risk in keeping more than $250k in an account, businesses can need to do it and are incentivized to do so.
SVB also promised an opportunity to rub elbows with other startup founders and be part of an exclusive group of customers, further incentivizing customers and ultimately adding risk to their financial decision to keep more money with SVB.
When SVB collapsed after the run, and their accounts frozen, depositors realized they only had $250k insured per account with the bank – which triggered a crisis for many businesses. Any amount over that $250k became essentially a credit claim, only receivable as the banks’ assets were sold off, with no guarantee of when or if the money would come back.
On Sunday, a second institution Signature Bank, with exposure to SVP, announced a collapse. One bank is bad. Two is a harbinger of system collapse. The stock market futures were starting to tank. Monday was looking very dismal. (it still could be – I am writing on Sunday! – but ….)
The FDIC announced Sunday evening that it was going to guarantee deposits at both these banks as part of a larger temporary program to halt a larger collapse of banking or business. The $250k insurance limit has been lifted for depositors and they can access all their money.
The funding for the depositor bailout is coming from the FDIC itself – not taxpayer money – who can designate a collapse due to “systemic risk” and then tap a special assessment fund which institutions who use the insurance pay into.
Important: this is not a bailout of the institutions Silicon Valley Bank or Signature Bank, but of depositors. The people who had money at the institution are being protected.
These institutions are in the death throes, are getting sold off for parts, and the shareholders of their stocks and bonds have lost their investments.
The difference between this and 2008 bailouts is that the banks and their shareholders are not being protected. It does feel like a somewhat more fair solution.
What do you think?
I don’t want to kneejerk celebrate things that cause suffering.
My anarchist dreams are hitting against my desires for security: faced with what I understand about what is happening / the FDIC is trying to stop, I don’t think I actually want to see a financial system collapse. The pain people will go thru – not having money for housing, food – seem so brutal. I’m not certain our government will help, or that our cities are resilient enough.
I want to be wrong. And, maybe I just need to be more imaginative and raise my expectations.
There was a pandemic and for awhile, there were cash payouts and an eviction pause.
There was a bank run and the feds stepped in to do a good thing and preserve people’s ability to pay their staff.
Maybe it could be handled by the institutions we have. Maybe the new ones we need will emerge. Maybe we will learn a lot pf new lessons…