Apr 3, 2023 6 min read

On March 10, the Silicon Valley Bank (SVB) became the second-largest bank in American history to fail. Demonstrating that Republicans believe “woke” is the source of all evil in the world today, they quickly claimed that the bank failed because it was too busy being “woke,” hiring people because of their race, gender or sexual preference instead of their talent, while lending money to diverse borrowers, or borrowers using unproven green technology instead of profitable enterprises.

I’m not sure which is worse – if the Republicans cynically use this strategy because it riles up their base, or if they actually believe it. Of course, banks have had a long history of failing while under the management of straight, white men, and SVB’s collapse had nothing to do with its loan portfolio.

Left-wing critics, such as U.S. Sen. Elizabeth Warren, were closer to the mark, placing the blame on corporate greed and a lack of regulation. But this was not 2008, when banks seeking to maximize profits made risky bets in unregulated markets that few people knew about, much less understood. Nobody is getting rich on a 4.5% interest rate on their checking accounts in an economy with a 6% inflation rate, so SVB depositors were not greedy risk-takers. While one can argue that the managers were greedy to seek the higher rate of return on the long-term Treasuries, the difference is so small that it seems complacency was a bigger factor than greed.

There is a stronger case for the lack of regulation being a factor. In 2018, congressional Republicans, along with some Democrats and the Trump administration, exempted regional banks from the stricter regulatory regime that Dodd-Frank had imposed as the price for bailing out the “too big to fail” banks in 2008. SVB, which had lobbied for the change, was one of the banks with reduced oversight. But even without the stricter scrutiny, the Federal Reserve Bank of San Francisco, which oversees SVB, had warned the bank as much as a year before its collapse that it was unprepared for rapid cash withdrawals. SVB chose to ignore the Fed’s warnings.

But it’s not clear that stricter oversight would have been enough to save SVB. The bank served a lot of tech companies that had a lot of cash, and not as much need for loans, so SVB needed to invest its excess cash. The bank bought a lot of Treasuries, which were theoretically very safe, except that they were long-term, which left the bank at risk if it had to sell them before maturity if interest rates rose. Interest rates had been very low since 2008, so that seemed unlikely. But in 2022, when fears of inflation led the Fed to rapidly raise interest rates at the same time the tech industry was retrenching, so it was withdrawing cash rather than depositing it, SVB was hit with the scenario the San Francisco Fed had warned about. Had SVB been able to hold those bonds to maturity, there would have been no losses.

What tipped SVB over the edge was a run on the bank exacerbated by the tech community leaders, some of whom had shared their concerns about SVB’s solvency and encouraged uninsured depositors to withdraw their money. The FDIC insures deposits up to $250,000, which is more than enough for private individuals. But companies with big payrolls or those that need flexibility kept much larger amounts. Roku, which manufactures digital media players, had over $400 million. A relatively high number of SVB’s customers had large accounts. More than 90% of the deposits were uninsured at SVB, whereas that figure at most banks is around 50%. Companies with large, uninsured accounts quickly tried to withdraw the uninsured funds. On March 9 alone, investors and depositors tried to withdraw $42 billion. No bank can handle that. Matt Klein, a financial journalist, blamed the panicky depositors more than incompetent bank mangers. He said it was “a bank-run by idiots”, not “a bank run by idiots.”

After some hesitation, the Biden administration made the politically unpopular but probably necessary decision to make sure depositors, even ones not covered by the FDIC insurance, would get 100% of their deposits back. In spite of this reassurance, J.P. Morgan has reported that in March, depositors shifted $500 billion from the “most vulnerable” banks to the systemically important banks that the government won’t let fail, and government-money market funds, which puts pressure on those smaller banks. This is bad for the economy because smaller banks are the ones that lend to local businesses.

Making wealthy depositors whole while ignoring people struggling with student loan debt is in line with Martin Luther King Jr.’s 1968 observation: “So often in America, we have socialism for the rich, and capitalism for the poor.” King was undoubtedly right, but in this case, I actually think it makes sense to bail out the depositors. Checking accounts are not investments, they are primarily ways to manage money safely. Had all of SVB’s accounts been fully insured by the FDIC, SVB’s liquidity problem would not have become a run on the bank. While many wealthy depositors will benefit from this backstop, they would have gotten most of their money anyway, but immediate payment averts greater harm to the economy, which would hurt many of the non-wealthy.

Investors and the managers, on the other hand, deserve to suffer financially. Stockholders have been wiped out, as they should be, but Greg Becker, the bank’s CEO, sold $3.6 million in SVB shares two weeks before it was taken over. Becker was also on the board of the San Francisco Fed, which oversaw SVB. This represents a serious conflict of interest, and maybe why the San Francisco Fed didn’t do more about its concerns. Bonuses were paid hours before the bank went under.

The FDIC should fully insure all checking account deposits, funded by fees on them, but regional banks with more than $50 billion in assets should be subject to Dodd-Frank regulations, and managers should be accountable. Manager stock trades should have a holding period to make sure they are not trading on inside information, and bonuses should be subject to clawback provisions in the event of a collapse.

Kent James is an East Washington resident.