Issue 149
March 26, 2023
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Vladimir Lenin said, “there are decades where nothing happens, and there are weeks where decades happen.” Perhaps nowhere is this truer than in the (normally) staid field of banking.

The 2008/09 financial crisis was catalyzed when a housing bubble – fueled by irresponsible and predatory lending, a dearth of individual accountability, and shoddy securities comprised of subprime mortgages - popped. The panic began with a rarely-mentioned, isolated “run” on a Florida investment vehicle underpinned by some of these securities and culminated with the undoing of Bear Stearns and Washington Mutual and the collapse of Lehman Brothers.

Government-brokered mergers forged hastily over a weekend, and taxpayer-funded capital injections into the largest financial institutions were executed to prevent a cataclysmic meltdown of the banking system.

Then Wall St sobered up. Stricter rules and regulations were implemented that required banks to hold more high-quality capital, restricted proprietary trading, and subjected the largest lenders to annual “stress tests.”

For over ~10 years the banking sector trudged along swimmingly, navigating the covid crisis and its aftermath without a hitch. Then something broke.

Houston, We Have A Problem

On March 10, Silicon Valley Bank (SVB), the nation’s 16th largest and primary lender to VC-funded startups and other tech firms, collapsed. It was a stunning display of what transpires when a bank run coincides with instant access via smartphone apps and mobile money. The bank was vaporized in ~48 hours after a botched capital raise triggered a run on its deposits. SVB was the second-largest bank failure in American history (The collapse of Washington Mutual was the largest.)

Days later, New York based Signature Bank was the target of a bank run and was seized by regulators. Other regional banks began to wobble after suffering their own waves of deposit outflows. Their fate is to be determined.

(The contagion spread overseas. Counterparties grew increasingly leery of transacting with Credit Suisse (CS), the venerable 167-year-old Swiss investment bank. On Sunday March 19, CS was forced into the arms of its crosstown rival, UBS, in a government-brokered transaction.)

A Brief History

The bank run that sealed SVBs fate was hardly unique. In fact, most bank runs share important characteristics. We will go into more detail about SVBs demise later in this post. But first, a (very) brief overview of the most significant bank runs in American history:

• Panic of 1819: The first financial crisis in the United States. The primary cause was over-speculation in land which led to the overproduction of agricultural commodities. The prices of both then collapsed. Multiple banks failed and a depression ensued.

• Panic of 1873: This crisis was catalyzed by frenetic buying in railroad stocks fueled by the public’s fear of missing out (FOMO), and credit extended by various investment banks. A price bubble formed. When it burst – as all bubbles eventually do - many investment and commercial banks went bust. A severe depression ensued that lasted years.

• Panic of 1893: After silver mines opened across the American west, overproduction led to an acute price drop. This in turn led to a decrease in the money supply and ushered in deflationary pressures. Many banks and businesses failed. A multi-year depression followed.

• Panic of 1907: Important drivers included rampant speculation (FOMO) in copper stocks fueled by overly generous margin lending courtesy of banks and brokerage houses. During the copper frenzy, a businessman named F. Augustus Heinze tried to corner the copper market; he failed, the bubble burst, and the price subsequently collapsed. Customers of banks that Heinze was associated with rushed to pull out their cash and panic spread. The Knickerbocker Trust Company collapsed. Other banks suffered the same fate. Stocks fell 50% from their previous highs. The panic subsided after J.P. Morgan, John Rockefeller, and other financiers injected cash into battered financial institutions. The aftermath of the Panic of 1907 was the creation of the Federal Reserve in 1913.

• Great Depression 1929-1930s: The cause of the Great Depression is multifaceted and certainly goes beyond the scope of this post. The direct trigger was the stock market crash of 1929. Confidence in the banking system quickly eroded. Bank runs and bank failures occurred all over America. A depression ensued. In 1933 the Federal Deposit Insurance Corporation (FDIC) was created to protect deposits and mitigate future bank runs. The initial cap was set at $2,500. Today it is $250,000.

• Savings and Loan Crisis (S&L) 1980s – 1990s: The S&L crisis was unique in that it was a slower-moving phenomenon. An acute rise in interest rates left many S&Ls upside down: saddled with fixed-rate loans but forced to pay prevailing higher interest rates on deposits to fund themselves. Over the duration of the crisis ~1/3rd of S&Ls failed.

(The current predicament shares some similarities to the S&L crisis. Click here to learn more.)

• Global Financial Crisis: 2008/09: See above.

(Bank) Run, Forrest, Run

The cycle of a financial crisis that often leads to bank runs typically is as follows: Irrational exuberance in a particular asset class leads to a price bubble. The bubble continues to grow because of FOMO and lenders that extend too much credit often collateralized, ironically, by the asset that is the subject of the price bubble! When the price of the asset - be it land, housing, stocks, copper, silver, railroads, bitcoin, even U.S. bonds, - reverts to the mean, the collateral (asset) used to obtain the loan is sometimes worth less than the credit that was originally extended. When this happens, leverage (credit) goes in reverse triggering a vicious negative feedback loop: Owners of the asset begin to sell indiscriminately. Lenders are often left with de-valued collateral. To salvage what they can, they sell too. This depresses the price further causing even more stakeholders to sell, pushing the value of the asset well below its intrinsic value.

Silicon Valley Bank

An interplay between horrific risk management, rising interest rates, a decline in the price of U.S. government bonds, mobile money, and psychology (more on that in the next section) were the primary drivers that sealed SVBs fate.

In the years leading up to SVBs failure, it grew rapidly. New businesses were flush with cash. Many deposited their monies with SVB, the “go-to” for Silicon Valley startups. SVB wrote new loans with some of the cash and bought U.S. government bonds at stratospheric prices with much of the rest.

Then rising inflation put the brakes on the economy. Concurrently, to combat inflation the Federal Reserve lifted interest rates from zero to 5% in ~12 months.

As the economy slowed, startups began to draw down their cash balances parked at SVB (and other banks). At first, SVB was able to meet customer demands with cash they maintained on their balance sheet. However, when the demand for cash increased, SVB needed to begin selling U.S. government bonds to satisfy cash redemptions.

Because interest rates were now close to 5%, the price of SVBs inventory of U.S. bonds was materially lower (government bond prices move inversely to interest rates) than what they paid for them. The bank could have, and should have, utilized commonplace strategies to control for or “hedge” this interest rate risk. They did not. Hence, when they liquidated bonds to meet customer demands for cash, they locked in a loss. This weakened their balance sheet.

To repair its balance sheet, SVB attempted to sell stock in the capital markets. When this news was made public, other depositors - many of which had no immediate need for their funds - got nervous and demanded their money back too.

SVB began to wobble, investors balked, and the bank could not raise capital. A panic ensued. In an instant, the one-time banking star of Silicon Valley was cut off from the capital markets and deluged with customer demands for cash. Their tech-savvy customer base used smartphones to expedite the process, worsening SVBs already precarious liquidity situation. Two days later regulators seized the bank, and the FDIC assumed control of its operations.

Citing a systemic risk to the financial system, the government took an unprecedented step and guaranteed all deposits over the $250,000 insurance cap for SVBs (and Signature Bank’s) remaining depositors. The Federal Reserve also allowed banks to access liquidity (cash) by pledging their holdings of government bonds at face value in exchange for cash. This was intended to mitigate the need for other banks to dump their bonds to raise cash, and by doing so locking in losses, leaving them undercapitalized too.


Perhaps the most important aspect of bank runs involves psychology. Specifically with respect to banks, the illusion of a problem can become a real problem if people’s perception shifts which, in turn, catalyzes a change in behavior.

Put simply, plain vanilla banking involves gathering deposits by offering interest on those monies and or perhaps personalized service to entice customers to park their cash there. The bank in turn lends that money out at a higher interest rate, earning a spread. Typically, a bank keeps 10% - 15% of cash on hand when customers need to make withdrawals. The rest is put to work in the form of loans. Hence, no bank can satisfy demands for all customer deposits simultaneously.

Therein lies the potential problem: even if a bank is perfectly healthy if enough people believe it’s not, it could induce depositors to demand their money back. If too many people demand their money back at the same time, a healthy and solvent financial institution can become insolvent very quickly.

To be clear, Silicon Valley Bank did have serious issues that contributed to its downfall. Signature bank did too. However, we are now entering a phase of the bank run where some healthy institutions are being targeted as well. It would be irresponsible to name those institutions because even the mere phantasm of a problem, amplified by chat rooms and smartphones, is causing a change in human behavior. This is dangerous. If too many people move their money out of those healthy institutions, those banks risk becoming sick too.

How Will It End?

All bank runs end; typically, when the public begins to think it will go on indefinitely.

It is difficult to predict how and when the current bank run(s) will cease. It is certainly possible that targeted banks will be able to muddle through until financial news is no longer plastered on the front page of newspapers and online. Panic would subside, and if needed, banks could then recapitalize themselves.

However, we sense that it will take a government guarantee of all uninsured deposits – not just at SVB & Signature - for a defined period of time for this crisis, mostly one of confidence, to conclude.