Silicon Valley Bank and Signature Bank: Probably Not a Big Deal

Silicon Valley Bank and Signature Bank: Probably Not a Big Deal. By David Evans. The topic de jour.

The collapse of Silicon Valley Bank on Friday is the second biggest bank collapse in US history, and the biggest since 2008. There are queues today outside some banks as depositors scramble to withdraw their money. Bank runs!

I’ve been watching these events for a couple of decades, and my guess is that this one will soon blow over. The system won’t collapse this time. SVB is not a systemically important bank, and there was little sign of stress in the banking system three weeks ago:

Banks becoming suspicious of each other is one of the early signs that a banking crisis is brewing. This suspicion is indicated by a rise in the average interest rate that banks charge each other for short-term financing relative to the interest rate paid by the US federal government for financing of similar duration …

The chart shows that the current spread is close to zero, which means that the interbank market is as calm (lacking in suspicion) as it ever gets.

On the other hand, this incident reveals the priorities of the ruling class:

In the comments, people point out that SVB is a techbro bank, and they’re Dem donors, while Signature has Barney Frank on its board. You people are so cynical.

And, also from the comments: “The government spent all weekend so they could bail out rich politically connected investors. Compare this to East Palestine Ohio where it took the government 3 weeks to even pretend to give a damn. Seriously the government worked over a weekend to just help out rich tech investors. Contrast that with 3 weeks before the feds did anything to even pretend to help out a community dealing with a massive chemical spill.”

Only deposits up to $250k are guaranteed, but the US Government is guaranteeing all deposits of any size. They didn’t have to. So who are the lucky recipients of this government largesse?

Steve Hayward:

The Federal government is going to bail out all Silicon Valley Bank depositors in total, which means Harry and Meghan (apparently large depositors) and all the Silicon Valley start-up companies who had their money in SVB will get it all back. So the billionaire venture capitalists on Sand Hill Road won’t have to re-capitalize their next moon shots themselves. …

What is the legal basis for the Federal Reserve, FDIC, and the Treasury to bust the $250,000 lid on deposit insurance? I guess that statutory ceiling was merely optional? A mere suggestion of Congress?

Ordinary bank customers will pay for their generosity:

The Deposit Insurance Fund is simply an indirect tax on all bank customers.


Few beyond banking aficionados know the Keynesian economics was largely a response to bank runs.

In the Great Depression, the main problem was in the US, and it stemmed mainly from collapsing banks. If a bank collapses, all the credit it has issued becomes worthless — effectively a significant chunk of the money supply disappears in a puff of smoke, back to where it came. This is very damaging to the economy, causing real businesses to go broke and causing big time unemployment.

Bank runs were common, formed on rumors, because people were so afraid. Yet bank runs could cause a bank to collapse — a nasty positive feedback. The FDIC insurance mentioned above was part of the government’s response, to stop those bank runs.

The other main government response was Keynesianism. A bank must cease trading — and is bankrupt — the instant its liabilities exceed its assets. The two main assets of the US and UK banks in the 1930s were customer deposits and bonds, often government bonds. If the value of their bonds dipped too much, they would collapse. Due to the very nature of bonds, the higher the interest rate the lower the value of a bond. Many banks were only borderline solvent, so it was very important — in order to keep the banking system from collapsing — to keep interest rates down. Enter Lord Keynes with his theory, which was basically an ad hoc and elaborate excuse for lowering interest rates. Keynesianism was considered a crackpot theory by the economists of the day and the preceding centuries, but it suits banks and governments so it has stuck and been made respectable ever since.

As it happens, the main assets of SVB were government bonds, bought back when interest rates were near zero percent, in the covid era, as the government urged banks to do. With the subsequent rise in interest rates, those bonds lost much of their value. Thus, SVB was in danger.

Sudden movements in interest rates always create economic dislocations. I wish the bureaucrats in charge of price setting understood this better.