‘Boring’ Silicon Valley Bank (SVB) Isn’t To Blame. Extend FDIC Coverage To ALL Premium-Paying, Regulatorily Sound Banks.


Something must be wrong with me. Suspicious of large banking houses nearly since youth, I am now finding it difficult to fault Silicon Valley Bank’s (SVB’s
) management or depositors for the second-largest bank failure in history yesterday. Worse yet, I am now wondering why we do not deposit-insure all bank deposits, in return for insurance premia and capital-regulatory compliance, of course – for their full amounts, not merely $250K per deposit, as we do now.

Please hear me out.

Any banking expert, especially any such expert who was around back in 2008, will tell you that the holy grail of any financial system is that there be at least one class of ‘boring’ financial institution to serve as safe haven for non-financiers to park savings, cash, or working-capital. The image of any such safe haven institution implies certain qualities on the parts of (a) typical depositors and (b) typical bank investment portfolios.

The typical depositor in such an institution is someone who isn’t gambling on price movements in secondary financial or tertiary derivatives markets, but is aiming instead to introduce and produce new product lines or services in primary markets – contributions to the ‘real economy’ that improve our material lives over time. Such ‘makers’ are producing, not ‘taking’ or speculating, and accordingly need repositories in which to hold ‘patient capital’ as their businesses get underway.

These repositories, for their part, must also refrain from mere gambling activity with depositors’ funds. They must instead prudently invest in actuarially sound business loans in the productive sectors on the one hand, while investing any additional holdings in safe, readily liquidated assets on the other hand. Where the latter are concerned, US Treasurys are (almost literally) the gold standard, the safest of the safe and the most liquid of the liquid – so much so, in fact, that they are accounted ‘near-moneys’ deserving of literally zero risk-weightings in all systems of risk-based capital regulation.

Now consider SVB and its depositors. SVB’s depositors are overwhelmingly tech startups and other high-growth firms in the most dynamic sector of the US economy – Silicon Valley. These aren’t financial high-rollers or speculators, let alone financiers or derivatives traders. They are entrepreneurs in the primary markets – the goods and services markets – precisely where we want to see entrepreneurial risk-taking. So far as we know at this time, the only risk-cavalier thing that any of them did was to hold deposits in excess of the FDIC insured deposit limit of $250K – more on which presently.

SVB’s portfolio, for its part, appears also to have been precisely what we should want to see – prudently evaluated loans to this same tech clientele on the one hand – lending to SVB something of the flavor of a tech credit union – and US Treasurys – safest of safe assets – on the other hand. This portfolio, along with the bank’s deposit base, unsurprisingly took a hit as Jay Powell’s Fed, misdiagnosing the cause of our macro-economy’s recent CPI inflation (it is supply- and profiteering-driven this time, not wage- or salary-driven) began raising interest rates with greater abruptness than at any time in the last 45 years.

This was effectively force majeure where SVB was concerned, and the only error that the bank seems to have committed was to have sold off some of its Treasurys and offered a new issuance of convertible bonds to the market in order to handle the squeeze between ultimately Fed-induced depositor losses and consequent withdrawal needs on the one hand and Fed-induced portfolio losses on the other hand. That was like blood in the water for incompletely insured depositors and short-sellers alike, inducing a classic self-fulfilling-prophecy style bank run.

But this feature of this bank run – its character as self-fulfilling prophecy, or what I long ago dubbed a recursive collective action problem – tells us precisely where we ought to focus our public response. SVB was not, and is not, fundamentally insolvent. Its crisis is literally none but a fear-induced liquidity crisis – a crisis that would not occur were all deposits fully insured, as FDR well understood when declaring our nation’s first ever ‘bank holiday’ in early 1933 till a new system of federal deposit insurance could be fashioned post haste.

What FDR saw was that the solution to a recursive collective action problem is an exercise of collective agency – in this case, a public action that removes the source of individually rational but unnecessary fears that aggregate into collectively irrational outcomes. That’s all that deposit insurance is. But to optimize it we must make it applicable to literally all relevant cases – all cases where only short-term liquidity, not mid-term or long-term solvency, is in question.

The time has accordingly come for a 2023 equivalent, almost 90 years to the day, of FDR’s 1933 bank holiday and rapid response insurance move: the President and Congress should immediately extend FDIC coverage to all sound bank deposits, in their full amounts. There is literally no reason not to do this. For again, SVB was not and is not actually insolvent – its trouble was all self-fulfilling prophecy. And banks that receive deposit insurance have to pay premia and comply with safety and soundness requirements already – just as do any policyholders in any insurance industry. Why not, then, recognize current FDIC limits for the anachronism they are and update them?

When a bank does literally everything that we have wished safe banks to do, and when its depositors are literally the very production-focused entrepreneurs we want all entrepreneurs to be, it is perverse to allow them – and our nation’s single most dynamic and productive industrial sector – to be penalized by no more than self-fulfillingly prophetic fear. Where fundamentals are genuinely sound and risk-taking is genuinely entrepreneurial in the primary, not secondary or tertiary market sense of the word, our safe havens ought to be guaranteed safe. And that goes for de facto credit unions as much as for commercial banks.

That ‘genuinely’ caveat rules out crypto and other tech pseudo-investments, of course. But it doesn’t rule out bona fide productive entrepreneurial activity. Yes, SVB’s depositors should have brokered their deposits to assure greater insurance coverage and yes, SVB should have enabled and encouraged that. But in the grand scheme of our now urgently re-industrializing national economy, those were but rookie mistakes, rendered all the more possible by a now catastrophically wrong-headed Fed.

The sensible solution is obvious: Insure all deposits that are compliant with FDIC soundness requirements, now and forever. And stay Powell’s rate-raising hand as we turn to the real drivers of our current inflation – severe underproduction and associated price-gouging by sociopathic corporate executives


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