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Banks Gone Wild
The U.S. banking system has seen its third bank failure this spring. Monday morning, the FDIC said First Republic Bank has collapsed. JPMorgan will take over the bank; depositors are not at risk, even those with more than $250,000 in their accounts.
The takeover follows the collapse during the week of March 10 of Silicon Valley Bank, and Signature Bank. Last week, U.S. government regulators released a report on the SVB and Signature Bank collapses, which in turn spooked First Republic’s investors and, probably, depositors, when they read that the bank had lost more than $100 billion of its deposits during the other banks’ collapse. All three banks were vulnerable because their depositors in the tech and finance sectors, both wealthy individuals and companies, are more likely to withdraw money as a shifting economy causes stress. Two reasons for that:
The tech sector runs partly on fumes of tech executives’ confidence, but the fumes are evaporating. Venture capital famously cares more about growth than profits; in good times, the system keeps pumping money into high-growth companies in anticipation of an exits – where public market investors or acquirers pay so much money for an unprofitable company that all the financing gets paid back. In a higher interest rate environment, exits are harder. Merger & acquisition activity for venture-backed startups recently fell to its lowest level in a decade.
In this new cold-hard economy, tech-focused banks are at risk because their companies and executives may start drawing down their accounts for everyday expenses like payroll, without replenishing the supply with fresh venture capital.
The second reason the tech-focused banks were more at risk is wealthy depositors – of whom there are many in the these worlds. If they have more than $250,00, above the FDIC insurance limit, they are apt to move their money in times of fear into too-big-to-fail banks. This is despite the fact that many smaller banks and other financial institutions offer sweep accounts that triple or quadruple federal deposit insurance.
Fear is contagious
Fear about banks’ stability is contagious, even globally. In March, Credit Suisse, a Swiss bank weakened by scandals, was caught up in the fear and had a sale orchestrated by its country’s regulators. There were real weaknesses at Silicon Valley Bank, the regulators’ reports show, but most of the cause of a bank runs is psychological, which is why it’s so important to be clear and accurate about what’s happening.
Silicon Valley Bank was short by a few billion dollars; on hearing that news, some venture capitalists, rather than stepping in to help forestall the crisis, pulled their money out, setting off the contagion that is costing US and global taxpayers billions of dollars. In Silicon Valley, a small number of wealthy individuals could have written checks to save the bank. In fact, if you look back at history, wealthy individuals have done just that: In 1907, JP Morgan (yes the bank is named for him) pulled together a bunch of wealthy New Yorkers to save the system that was experiencing a similar collapse in confidence.
Are the weaknesses in the tech banks a sign of the tech industry’s decline as a money-making engine for investors and the poster child of the U.S. economy? Yes. We’re at the beginning of a major cultural backlash against big technology itself, I believe. Consider the last time a software system overbooked you onto a plane flight, and the human being at the gate had no power to help, or the vagaries of demand pricing, or the new pariah status of social media. The lack of effective management at Silicon Valley and Signature – which pursued rapid growth by soliciting the business of wealthy individuals, even though their propensity to withdraw money under stress was known — is one more sign that the tech economy was running on overconfidence.
The tech sector is important because it plays an outsized role in producing innovation, but it’s a only a part of the US economy, contributing about 10% to the GDP, according to Statista. (Tech is also a too-large part of the US media).
Is the failure (or near failure) of these three banks a sign of overall weakness in the US economy? I think not: The market, which closed a strong month on Friday, apparently agrees. Though there’s a recession looming, it looks like we’re in a fairly normal cyclical downturn, which seems inevitable after the pandemic-era government spending and post-pandemic inflation. Originally, regulators worried that regional banks that weren’t exposed to the tech sector would also be vulnerable. That doesn’t appear to be the case – though regional banks saw some outflows to too-big-to-fail banks.
Some big tech-oriented executives, including billionaire tech investors Steve Case, have mischaracterized the importance of the tech banks to the economy. He wrote an op-ed in The Washington Post, saying that SVB banked “not just tech companies, but nearly half of the nation’s start-ups.”
Meanwhile, Silicon Valley Bank had about had about 40,000 customers. There are more than 30 million small businesses in the United States, and more than six million small businesses that employ people. Tech banks had and have a place, but their importance and that of their wealthy depositors shouldn’t be exaggerated – not in good times, and not in bad.
