The FDIC guaranteeing deposits for Silicon Valley Bank and Signature Bank isn’t a bailout; it’s the U.S. honoring a guarantee. Bank shareholders are being wiped out.
Customers in line outside Silicon Valley Bank headquarters in Santa Clara, California, US, on Monday, March 13, 2023. The collapse of Silicon Valley Bank has prompted a global reckoning at venture capital and private equity firms, which found themselves suddenly exposed all together to the tech industry's money machine.
The FDIC and Federal Reserve also altered traditional bank capital rules for the next year to make it easier for banks to raise funds quickly by offering loans against certain bonds as collateral instead of forcing a sale of these same bonds. That was a direct response to a mistake SVB made recently, which the regulators don’t want other banks to repeat.In the context of banking and insurance, the term “moral hazard” refers to the idea that it’s bad when governments bail out risk-takers.
Bank management invested a 2019-to-2022 surge in deposits in the seemingly-safest type of security available: U.S. Treasurys The uncontrollable and sudden thing happened late last week, which is that a large number of customers — particularly venture capital investors who formed a concentrated part of SVB’s deposit base — got spooked and pulled their deposits. That became a self-fulfilling bank run. A bank run isn’t something SVB — or any bankThat last point is worth understanding and repeating. No bank in the U.S. holds cash on a 1-to-1 basis to match customer deposits. Any bank in the U.S.
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