Why SVB's meltdown shouldn't make you panic
Perfect storms occur in batches. It's never a single event, a single wave. Bank execs, like ship captains, earn their keep during times of upheaval, in the storm. The good ones have insights that shine by anticipating events, examining cause and effect, assessing risk, and charting the best course through rough seas.
Silicon Valley Bank grew deposits by $100 billion in a year and a half. That is the first wave in a perfect storm. The problem or opportunity originated from easy money with which the Federal Reserve flooded the economy (printing $9 trillion via Quantitative Easing). SVB depositors were high-tech recipients of government spending on ESG and DIE projects. Those deposits are considered hot, subject to withdrawal at a moment's notice.
SVB's next mistake was to mismatch volatile deposits by investing in long-term bonds. They invested those deposits in ten-year Treasuries yielding 1.6%. Then SVB execs and bank examiners were distracted by meaningless woke activity; they spent more time on social justice than on bank fundamentals.
The next wave was, once again, Fed Reserve action. This time, it was interest rates and Fed tightening. The Fed raised rates in 2022 by 4.50% in a year. That is way too rapid. It caused an inverted yield curve, squeezing net margins, and caused a massive decline in bond face value. The decline in bond value matters only if the bank has to sell that bond for liquidity purposes. Go back to the mismatch between hot deposits and ten-year bonds investments.
When you operate a bank so close to the edge, as did SVB, it doesn't take much to push you over. In this case, it may have been a tweet, much like the butterfly in Africa causing a hurricane in the Caribbean. The hot deposit owners, the tech giants, got wind of some issue at SVB and tweeted the alarm. That final nail caused the run that brought them down.
The vast majority of banks and bankers appreciate the dangers of perfect storms and manage their banks in a moderate, balanced, and conservative manner. Don't be confused by fear into thinking a lot of banks make the same mistakes as did SVB. Understand the clear (in hindsight) path SVB took to destruction and realize that bank owners don't want to suffer the same, and inevitable, consequences for poor management.
Jay Davidson is founder and chairman of a commercial bank he started in 1995. He is an adherent of the Austrian School of Economics and an ardent believer in individual freedom and capitalism.