Banking is a confidence trick. Financial history is littered with runs, for the straightforward reason that no bank can survive if enough depositors want to be repaid at the same time. The trick, therefore, is to ensure that customers never have cause to whisk away their cash. It is one that bosses at Silicon Valley Bank (svb), formerly America’s 16th-largest lender, failed to perform at a crucial moment.
The fall of svb, a 40-year-old bank set up to cater to the Bay Area tech scene, took less than 40 hours. On March 8th the lender said it would issue more than $2bn of equity capital, in part to cover bond losses. This prompted scrutiny of its balance-sheet, which revealed around half its assets were long-dated bonds, and many were underwater. In response, deposits worth $42bn were withdrawn, a quarter of the bank’s total. At noon on March 10th regulators declared that svb had failed.
It might have been a one-off. svb’s business—banking for techies—was unusual. Most clients were firms, holding in excess of the $250,000 protected by the Federal Deposit Insurance Corporation (fdic), a regulator. If the bank failed they faced losses. And svb used deposits to buy long-dated bonds at the peak of the market. “One might have supposed that Silicon Valley Bank would be a good candidate for failure without contagion,” says Larry Summers, a former treasury secretary. Nevertheless, withdrawal requests at other regional banks in the following days showed “there was in fact substantial contagion”.