Silicon Valley Bank was Killed by the Federal Reserve Board

By JOEL D. JOSEPH

Silicon Valley Bank was set up in 1983 to service the high-tech economy that dominates Silicon Valley. The Valley is home to Apple, Google, Facebook and hundreds of smaller leading-edge companies. Silicon Valley is one of the major engines that have kept the United States economy flourishing for the past 20 years.

Silicon Valley Bank reported a profit of $3.4 billion for 2022, when it had $172 billion in deposits. SVB has been the highly respected financier for high-tech startups. Between the end of 2019 and the first quarter of 2022, the bank’s deposit balances more than tripled to $198 billion. SVB’s assets exceeded its liabilities by more than $20 billion. It was very financially sound.

The bank invested the bulk of its deposits in US government bonds. “Based on the current environment, we’d probably be putting money to work in the 1.65%, 1.75% range,” said the bank’s CFO at the beginning of 2022, referring to the yields he wanted to achieve. Nobel-prize winning economist Paul Krugman said, “the bank parked much of that money in boring, extremely safe assets, mainly long-term bonds issued by the US government and government-backed agencies.”

The trouble is that when interest rates started to go up, bonds got hit hard. On March 8, the bank announced a loss of approximately $1.8 billion from a sale of investments, US treasuries and mortgage-backed securities that it needed to pay depositors who wanted to cash out. These investments were very prudent. US treasury bonds are considered among the safest of investments that banks can make.

The Federal Reserve Banks raised interest rates faster than it has in 50 years. The Fed raised interest rates from a low of 0.25% in March of 2022 to 4.75% 10 months later. Despite Silicon Valley Bank being in sound financial condition prior to March 9, 2023, investors and depositors reacted by initiating withdrawals of $42 billion in deposits from the bank on March 9, 2023, thus causing a run on the bank. An autopsy will show that the Federal Reserve’s drastic interest rate increases were the cause of death.

Silicon Valley Bank had $41 billion in cash ready to pay customers. It was just $1 billion shy of having all the cash that it needed.

Within 36 hours, the bank was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. As of the close of business on March 9, the bank had a negative cash balance of approximately $958 million. The precipitous withdrawals caused the bank to be temporarily incapable of paying its obligations as they came due.

Silicon Valley Bank is Not Blameless

Silicon Valley Bank employees received their annual bonuses Friday, just hours before regulators seized the bank. The size of the payouts couldn’t be precisely determined, but SVB bonuses have ranged from about $12,000 for associates to $140,000 for managing directors, according to Glassdoor.com. SVB was the highest-paying publicly traded bank in 2018, with employees getting an average salary of $250,683, according to Bloomberg. The bank had 8,528 employees as of December 2022. The average bonus was about $50,000 per employee, possibly much higher. The total of bonuses paid on the day the bank was seized by the federal government was thus about $425 million, nearly one-half of its shortfall on its last day of business. There is no doubt that the bank, if it had planned better, might have survived by freezing bonuses and cutting back on other extravagant spending.

What Can Be Done to Prevent Future Runs on Banks

The federal government has insured bank accounts up to $250,000 since 2010. Before that it was only $100,000. To prevent future runs on banks, the cap on insured accounts should be removed. In other words, all deposits at FDIC-insured institutions should be covered. To cover this increased cost, the FDIC should raise the premiums charged to banks for this comprehensive insurance. With risks on all checking and savings accounts significantly reduced, this increase in rates should be very small. In fact, increased protection of these accounts is likely to prevent nearly all runs on banks. If all deposits are fully insured, customers will have no reason to cause a run on a bank.

Joel Joseph is an attorney and chairman of the Made in the USA Foundation, a non-profit organization dedicated to promoting American-made products. Email joeldjoseph@ gmail.com.

From The Progressive Populist, April 15, 2023

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