SVB Meltdown (Part II): The Twitter-fueled Bank Run

Hello there, and welcome back to this two-part series about the collapse of SVB. Today, in part two, we continue how the Fed’s raising of interest rates played a significant role in the meltdown of Silicon Valley Bank.

The Federal Reserve mainly raised interest rates to control inflation. But it also brought around some unexpected consequences. Higher interest rates meant the bonds SVB had purchased suddenly plunged in value. Then the bank’s funding, deposits from tech startups, started drying up because it cost more to borrow money now, and these startups faced a funding drought from the venture capital funds that backed them. That forced some businesses to withdraw money to fund continued development and expansion.

Over time, the bank’s balance sheet started piling up with unconscious losses as customers frantically withdrew their money. That amount totalled billions of dollars in losses and took a heavy toll on the bank’s financial wellness. When the bank finally perceived its mistake, it tried quickly gathering up money. It announced that it had sold its bonds at a substantial loss, which only incurred more panic.

This time it was the venture capital firms themselves who freaked out, starting what is dubbed “the first Twitter-fueled bank run,” a panic which spread through social media as tweets and text messages. It was also partially why SVB collapsed so fast, as news of the bank’s possible collapse spread like lightning across the web. That’s how bank runs work; A self-fulfilling prophecy, where the bank run happens in part because of the investors’ belief that other people would rush to get their money out.

Startup founders who had invested in SVB faced a tough decision when they learned the bank might fail. They could move their money to another account to keep it safe, though it could cause the bank to collapse and harm other startups. Alternatively, they could do nothing and ‘gamble’ that other startups did the same, but if enough businesses moved their money, it would be disastrous for those who didn’t. Alas, startups prioritised their survival over the greater good, leading to the SVB collapse.

So what happened afterwards? Did SVB lock its doors? The answer is no, which isn’t that surprising. U.S. government regulators, specifically the Federal Deposit Insurance Corporation (FDIC), halted all trading of SVB and seized the bank’s assets. The FDIC is a government agency that’s primary job is to insure deposits of certain banks and amounts in case the bank fails. It also supervises financial institutions for consumer protection and safety. Under normal circumstances, the agency insures all depositors in FDIC-backed banks with $250,000 per depositor per bank. However, because SVB’s customers are mostly startup businesses, and startups put more money in banks, this amount isn’t necessarily enough to cover all losses if SVB defaults. That is why startups withdrew frantically at the possibility of a bank run. But after regulators seized SVB, the FDIC promised all depositors that they would get access to the whole of their money, meaning that all deposits into SVB were insured.

However, this move by the FDIC has been quite controversial. Those who denounce the agency say that large banks need to feel the consequences of their actions, or else next time a big bank is in trouble, it would believe that the commission would insure it and not try to do anything which could ruin the economy. On the other hand, people who praise this decision say that if the FDIC hadn’t stepped in, it would have caused a more massive panic in the tech industry, which has already seen layoffs in the past year due to pandemic revenue losses.

Where do you stand? Do you agree with the FDIC’s actions? We can only hope such a bank run wouldn’t happen anytime soon. This production was brought to you by the New News Newsminute. Thank you for reading, and tune in next week for more news updates and analysis.