Why it’s much worse this time
Silicon Valley Bank (SVB) has a significant presence in the startup and venture capital communities, and its failure could lead to a ripple effect of financial losses and disruptions in these sectors. That fact has been well reported over the past few days. What hasn’t been highlighted, which we will attempt to do here, is understand the magnitude of the losses depositors will incur if a white knight – either the FDIC or a buyer of the bank — does not come along and make depositors 100% whole.
SVB’s business model caters to venture capitals and funded startups, both of which carry much higher balances than consumers. As a result, the FDIC’s $250,000 maximum for insured deposits does little to help SVB’s customer base.
SVB’s collapse is second only to the Washington Mutual’s (WaMu) collapse in 2008 in terms of bank deposits – WaMu has $188B compared to SVB’s $169B. However, when ranking bank failures by potential losses from uninsured depositors, which we believe is a better measure of the economic impact to the economy, SVB is 3x worse than WaMu:
Keep in mind that 100% of depositors in WaMu were made whole when J.P. Morgan acquired the business, so the $49B in potential depositors’ losses to never materialized. As of this writing, there have been no proposals floated to protect the $151B in uninsured deposits at SVB. If no solution manifests within the next 48 hours, we suspect the contagion will spread at unprecedented speed to other banks with large, unrealized losses as consumers withdrawal now and ask questions later.
Compared to some of the larger bank failures in 2008, SVB’s 89% of uninsured FDIC deposits are standard deviations away from the large 2008 failures:
Our prediction regarding the contagion velocity is derived by a review of the 2008 financial crisis and last week’s withdrawal activity at SVB. As shown by the table below, prior bank runs took weeks after bad headlines. For example, when IndyMac collapsed, WaMu saw $9.1B (4.9% of deposits) withdrawn over 23 days. By contrast, SVB’s bad news released on March 8th sparked withdrawal requests of $42B (24.8% of deposits) on March 9th, which is breathtaking. SVB was not able to process the entire $42B in requested withdrawals in one day, but the velocity demonstrates how contagion in 2023 could look much different than what we experienced in 2008.
We suspect the withdrawal velocity SVB has experienced is the result of a variety of factors: 1) high percentage of uninsured deposits (89%), 2) improved convenience in payment platforms for wires and ACH withdrawals, and 3) accelerated flow of information via ubiquitous social media platforms.
We hope the following solutions are implemented to contain the collateral damage from the SVB collapse:
- Merge SVB with a bank with a strong balance sheet to guarantee all SVB deposits
- Remove the FDIC-insured deposit limit of $250K so all bank deposits are insured
We predict an SVB merger will be announced in days, but raising the FDIC-insured limit may not happen soon enough to stop the contagion. We are already hearing about other banks with high unrealized losses being inundated with withdrawal requests.
Sources: Silicon Valley Bank Mid Quarter Update