Why Silicon Valley Bank, though? What made it especially vulnerable? One reason is that many of its loans are in the tech sector, which as you may have heard is hurting. Another, perhaps more important reason is that it relies heavily on deposits from institutions rather than individuals.
The people who run companies, investment funds and other institutions are always looking for the highest yield they can earn, so they’re quick to yank money from a bank and put it in, say, a money-market fund. Also, institutions will rush to pull their money out of a bank if they think it might go bust. Even if they’re convinced that the bank is solvent, they might take their money out because they fear others will pull their money out.
That’s a classic bank run. True, institutions’ deposits are protected by the F.D.I.C., but only up to $250,000, which is meaninglessly small for them. Before the F.D.I.C. takeover, Sunny Juneja, founder of Canopy Analytics, a Bay Area start-up focused on real estate technology, told The Times that he was “doing everything I can” to yank his money out of Silicon Valley Bank: Although the bank had been a good partner, he saw no upside to staying and no downside to leaving.
Silicon Valley Bank is “the slowest antelope in the pack,” Anil Kashyap, a professor at the University of Chicago’s Booth School of Business, told me.
Stock prices of some other regional banks have fallen as well. In contrast, the nation’s biggest banks — Bank of America, Citibank, JPMorgan Chase and Wells Fargo — have held up better because they rely more heavily on small individual depositors who pay less attention and move their money more slowly.
Anat Admati, a colleague of Duffie at Stanford, told me that banks would be less vulnerable to runs if they had thicker safety cushions of equity. That would mean less borrowing for any given level of assets, so that even if those assets lost a lot of value, they’d still be worth more than the liabilities.
The big question now, for markets and regulators, is whether many other banks are about to falter. To prevent a cascading financial crisis, the F.D.I.C. could insure all of banks’ liabilities, including all deposits without limit, as it did during the global financial crisis. But taxpayers wouldn’t like bailing out banks and their big depositors from their bad decisions. “Being so heavily indebted, banks always want to benefit from magnified upside (juiced by leverage) and leave downside to others,” Admati wrote in an email.
Peter Coy
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