If you’re like me, when you hear that there’s been a “run on the bank,” your mind goes to the scene of the old Bailey Building and Loan, when plucky newlyweds George and Mary avert catastrophe by using their honeymoon savings to keep the doors open.
Needless to say, the collapse of Silicon Valley Bank last week, followed over the weekend by Signature Bank, was nothing like that.
The potential cascading effect and its impact in Utah alone — where roughly one job out of every seven is in a tech-related field — had devastating potential.
Gavin Christensen, the founder of Utah’s Kickstart Fund, said that had the Federal Reserve not announced on Sunday that deposits would be covered, hundreds of Utah companies with thousands of employees would have been teetering on the brink.
Some would have been unable to make payroll or pay vendors, some would have had to resort to layoffs and some might have been put out of business entirely.
Utah Gov. Spencer Cox said Monday that the state had put together a plan to step in and help keep businesses afloat.
Carine Clark, chair of the governor’s economic opportunity board, told members of Silicon Slopes that the groundwork had been laid to tap an Industrial Assistance Fund — a fund used last year when farmers were coping with the fallout of record drought — to try to help smaller start-ups get employees paid and keep the lights on.
Silicon Valley Bank became the go-to for technology businesses because it uniquely tailored its services, fees and lines of credit to fit the needs of tech companies, Sunny Washington, the director of Utah Tech Leads PAC, told me Monday.
It was one of the fastest-growing banks in the country and, on the surface, at least, there was little to foreshadow what was to come.
“It was a thriving bank, it really was,” Washington said.
But beneath the surface, there were problems that were going undetected or ignored.
Addressing the tech community and reassuring his own customers, Zions Bank President Scott Anderson contrasted how SVB operated in comparison to the Utah-based bank, most critically pointing out Zions’ diverse portfolio of clients.
“Our strategy has been to focus on a large number of small- and medium-market businesses in a wide diversity of industries, as opposed to the narrow strategies followed by Silicon Valley Bank and Signature Bank,” he said.
The benefits of that strategy are obvious: A hiccup in one industry won’t turn into an avalanche that threatens the bank’s survival and that of the customers counting on having their money.
Zions, Anderson said, never sought to expand as aggressively as the failed banks and hasn’t grown based on massive accounts from one sector. The average deposit at SVB was 22 times larger than the average deposit at Zions. Indeed, more than 90% of the accounts at SVB exceeded the $250,000 threshold that the FDIC will insure.
Randall Quarles, the former vice chair of the Federal Reserve chair of the Financial Stability Board said SVB was unusual in its concentration and its heavy investment in treasury bonds that became less attractive as interest rates rose.
When customers wanted to withdraw funds, the money wasn’t there, while social media-fueled a run on the bank — $40 billion pulled from the bank in four hours, Quarles said, “which no bank could withstand.”
It’s frustrating, though, that we seem to have found ourselves watching an all-to-familiar story, not the quaint bank run in “It’s A Wonderful Life,” but the catastrophic collapses and ensuing bailouts amid the housing crisis barely more than a decade ago — right down to the bonuses paid to SVB executives hours before the FDIC took control of the failing institution.
We were told at the time that steps had been taken to try to make sure it didn’t happen again. But as Sen. Mitt Romney put it Monday, “Either the regulations or the regulators didn’t provide the warning that was necessary.”
In the context of the potential contagion that could have shuttered businesses and cost thousands of our friends and neighbors their jobs, regulators had little choice but to intervene and early indications are they are doing it the right way. Those who had money in the bank will be made whole, but not the shareholders and executives in the bank. The money will not come from taxpayers, but from a fund paid into by banks all across the country. SVB’s assets will be sold off and the bank will cease to exist.
Assuming the intervention stops the falling dominos, the next step will be to, once again, dissect what went wrong and how to avert the next banking crisis.
Writing in The New York Times, Sen. Elizabeth Warren, D-Mass., blamed Congress’ action in 2018 to loosen regulations and stress test requirements for banks with less than $250 billion in assets, up from the previous $50 billion threshold. The argument was basically that banks like SVB weren’t too big to fail, until, it turns out, they were.
Then, Sen. Mike Lee and the rest of Utah’s delegation supported the bill easing the regulations.
Had the rules not changed, Warren wrote, SVB and Signature would have had stronger oversight, higher liquidity standards and regular stress tests. Chris Peterson, a law professor at the University of Utah and former counsel to the Consumer Financial Protection Bureau, agrees.
“In 2018, during the Trump administration, Congress relaxed the scrutiny designed to prevent this type of collapse,” he told me. “Frankly, that decision was a mistake, as we’re seeing now, and we should consider returning to the 2010 post-financial crash rules.”
It’s a sensible place to begin the discussion, but banks and their lobbyists will fight back like crazy and, given the divided Congress, win. So the system will churn along until the next run on the bank, and George Bailey or the FDIC or taxpayers have to step in and avert the next catastrophe.
