The speed of financial transactions has increased significantly in recent years, thanks to advances in technology and the growth of the global economy. Today, people can transfer money from one bank account to another, pay bills, and make purchases with just a few clicks of a button—even on their cell phones. But while, for years, we have all been pushing for faster financial transactions, was there an unintended consequence that exacerbated the Silicon Valley Bank (SVB) collapse?
Over the last ten years, the common method of moving large amounts of money has changed. When I worked in a finance office fresh out of college, my manager would ask me to move money from one bank to another. A decade ago, that meant going to our bank, getting a check printed, then going to our other bank to deposit that money. Trust me, we thought twice before moving cash around, and it took time. Now, sending a same-day Automated Clearing House (ACH), Electronic Funds Transfer (EFT), or wire transfer, has become more common, and more banks offer the capabilities to initiate such transactions online. Costs to initiate those transactions have also decreased.
The speed of money movements played a significant role in SVB’s collapse. The bank failed at an alarming pace, resembling a classic bank run where too many depositors withdrew their funds simultaneously. It was so rapid that it could be a textbook example or even a classic movie scene.
For those who have heard me mention my Gram before, “It’s a Wonderful Life” is her favorite movie. Let’s say she’s not hoping to hear George Bailey tell her, “The money’s not there!”
SVB’s customers were withdrawing their deposits beyond what the bank could pay using its own cash. By December 31, 2022, SVB had $175 billion in deposits, according to regulators, and “44% of U.S. venture-backed technology and healthcare publicly traded companies banked with SVB.” That was a concentrated and centralized deposit base. Regulators typically advise banks to have less than 25% of their capital in a particular business sector.
It took four decades to build SVB, and here’s how quickly it was dismantled:
- March 17, 2022 – As soon as the Fed began raising interest rates, SVB depositors drew down $25 billion in the following months following; that represented 13% of the bank’s deposits. Start-ups and tech companies, most of SVB’s deposit base, rely on capital to operate. Generally, as easy-money policies wind down, they draw on their deposits.
- February 24, 2023 – SVB’s auditors issued a clean audit, indicating no material discrepancies in the bank’s financial statements.
- March 8, 2023 – SVB reported it would take a loss after selling some of its investments before maturity to cover their clients’ cash withdrawals. As the panic spread through texts and social media, venture-capital firms began moving their deposits.
- March 10, 2023 – Federal regulators announced they would take control of the bank. By this time, depositors had withdrawn another $42 billion, in just over 36 hours.
The bank closure was NOT due to exotic financial instruments that doomed banks in the financial crisis. Rather, it was a complete mismatch between the bank’s assets (loans) and liabilities (deposits)—the vanilla business of banking. Additionally, social media users, which hadn’t been a factor during the last banking crisis, reverberated the news throughout their platform(s), whether true or false, about SVB, which spooked its customers. This caused depositors to grab their phones, open their banking apps and, with a few taps and swipes, move their money out of SVB.
If all U.S. depositors were to withdraw their funds at the same time from their banks, America’s banks would have to provide approximately $19 trillion in deposits—that’s $19 with 12 zeros!
Here’s a fun fact: If you were to spend $1 every second, it would take you about 32,000 years to spend $1 trillion. So, $19 trillion is a lot of cash.
If all depositors ask for their money to be withdrawn at the first opportunity, banks could not possibly repay them. Our banking system is built on trust.
The truth is that humanity has also pursued speed, which will never change. But did the banking industry or regulators fully understand the risks of the rapid technological advancements in the banking boom that made it easy for customers to pull $42 billion out of one bank within a few hours?
This event prompts several key questions for regulators and those responsible for managing public funds:
- Public deposits were never susceptible to losses, even before regulators took over the banks, due to laws that protect taxpayer funds. But do you have deposit-concentration risk? How are you determining how to allocate your deposits?
- What factors influence your investment and banking decisions? How are you utilizing data to inform those decisions?
- How can regulators prevent a panic run on banks when money can be moved online so quickly and easily?
- What responsibility, if any, do social-media-platform influencers have for aggravating a run on our banking system?
- Can you have 100% confidence in your cash-management strategy without verified data to balance cash receipts with cash disbursements?
- What procedures do you have in place to robustly monitor your collateral?
- What cybersecurity protections and rehearsed business-continuity plans do you have in place for financial transactions?
- Banks are subject to complex regulations and compliance requirements. How do you ensure compliance with regulations?
Learn how three+one can help you better understand these answers and the value of your cash.
Sources:
https://www.bis.org/publ/qtrpdf/r_qt1703g.htm
https://www.chicagobooth.edu/review/bank-runs-arent-madness-this-model-explained-why
https://www.imf.org/external/pubs/ft/fandd/2002/09/nsouli.htm
https://www.pbs.org/newshour/economy/why-silicon-valley-bank-and-signature-bank-failed-so-fast
https://www.nytimes.com/article/svb-silicon-valley-bank-explainer.html
https://www.reuters.com/markets/us/global-markets-banks-sector-analysispix-2023-03-11/
https://www.wsj.com/articles/bank-collapse-crisis-timeline-724f6458?mod=Searchresults_pos2&page=1
https://apnews.com/article/bank-failures-poll-confidence-economy-5915263dd274314030eb055df2463d18
