Act now to prevent SVB’s failure from becoming a national crisis
Image: ABC News
By Kyle Teamey, Josh Resnick, Tess Cameron, and Peter Kolchinsky
Kyle Teamey is Managing Partner, Planetary Health, at RA Capital Management. Josh Resnick is Managing Director at RA Capital Management. Tess Cameron is Principal, Strategic Finance, at RA Capital Management. Peter Kolchinsky is a founder and Managing Partner at RA Capital Management and author of The Great American Drug Deal.
March 12, 2023
To the Honorable Secretary Janet Yellen and Chairman Martin Gruenberg,
cc Senate Majority Leader Schumer, Senate Minority Leader McConnell, Speaker McCarthy, House Minority Leader Jeffries, Chairman Brown, Ranking Member Scott, Chairman McHenry, and Ranking Member Waters
The federal government must address the failure of Silicon Valley Bank (SVB) with speed and clarity before it metastasizes into a national crisis. It would be best if the FDIC issued guidance today as to when uninsured deposits will become available. If that guidance comes Monday morning, that’s better than Monday afternoon or Tuesday, because further chaos expands while we wait for reassurance. With clarity, the ecosystem of institutions in which SVB has operated, including other banks and investors, can help bridge companies so that they can continue to operate while they wait for their deposits.
SVB was neither an IndyMac nor a Lehman. As the FDIC pointed out in its press release, SVB’s assets exceed its deposits by a wide margin. Creditors and shareholders have paid the maximum price for any poor judgment by management, but until depositors in SVB checking, savings, and money market accounts are told that they will be kept whole, the message that the whole country hears is that no American bank is safe.
We believe the money for depositors will be there, but the timing is unclear. Every hour of uncertainty poses risks that must not be underestimated.
The Stakes
In spite of the bank’s name, SVB provided services to entrepreneurs and small businesses everywhere in the United States.
The failure of SVB is a direct threat to U.S. national competitiveness. Technology startups are the core of America’s economic and national security advantage. Rapid action can secure these advantages. The wrong move could set back U.S. competitiveness and innovation for years, jeopardize U.S. climate change and energy investment goals, delay or stop access to critical new treatments for patients, and threaten half of technology startup companies in the U.S. with bankruptcy. These companies working on technologies critical to ensuring national security, averting the worst of climate change, and stopping some of humanity’s worst diseases could simply cease to exist.
Policymakers will see their priorities directly undermined. Among the funds frozen with SVB are grants awarded under the Inflation Reduction Act and other federal programs, which likely number in the billions. Efforts to mitigate climate change, accelerate the pace of new energy development, build energy infrastructure, build manufacturing infrastructure, and build semiconductor infrastructure will be impaired. Any “haircut” on accounts will necessarily include federal dollars.
There is a high risk of contagion. SVB appeared to be well capitalized and had a relatively small loan book compared to other banks. Clients reasonably felt their capital was safe, and financial experts have said that the bank was solvent enough to fulfill even above-normal deposit withdrawals, but once the bank-run started it was impossible to stop it, let alone fund it, all in the span of one day.
If one can’t trust that their money is safe at a bank in which 62% of their assets are in the likes of cash or other government-backed securities, then how can we trust banks that have more than that in non-government backed loans?(1) No bank can withstand such a run on its deposits. There is a high probability of the panic spreading if it is not properly contained.
No Moral Hazard - Just Needless Hazard
When investing in risky biotech and cleantech R&D, we know that we may lose money on those investments. But we never signed up for the risk that the cash we need to keep on hand at a top 20 bank to make those risky investments is itself at risk.
Our returns stem from R&D. Our portfolio companies seek nothing from the excess cash in their bank accounts other than cash preservation. For the vast majority of our careers, our excess cash has earned less than 1% per year. There was even a period of time when interest rates were negative (meaning we were actually paying banks just to hold our cash). It is only in recent months – driven by the Fed's decision to rapidly raise interest rates – that excess cash has started earning above 1% interest. In other words, what depositors were seeking from SVB was the very opposite of Moral Hazard. They looked at SVB and saw a stable, large bank with a long history and solid balance sheet. They were seeking the lowest downside risk possible, even at the expense of reduced upside potential. SVB was a safe place to put cash. Its customers were not speculators, just everyday run-of-the-mill depositors.
These are the very same people who make countless cash deposit decisions every day at countless banks – big and small – across the country. SVB depositors were looking for safety, not extra profit. It is true, they were not scouring the bank’s regulatory filings to look for hidden hints of weakness – nor should they be expected to. It is not their job, and it is not something they are qualified to do. What they saw in SVB was a big, safe bank with good customer service; a safe and convenient place to park cash.
If SVB depositors aren’t made whole, those who panicked most quickly and instigated the run on SVB will have been rewarded with their cash, while those who acted soberly and responsibly will be punished. The lesson will be learned: don’t be late to the bank run next time, be hyper-vigilant and quick to react to every rumor, and try to get good at the game of musical chairs.
The Message
Depositors’ fear of what happens when their bank fails is almost certainly exaggerated; the history of receivership strongly suggests that depositors of a bank of SVB’s quality will be made whole one way or another. And yet, not being financial experts, depositors count on experts like those at the FDIC to calibrate them in times like these. Until then, they fear the worst, so rapid clarity is essential.
While the FDIC’s stated commitment to quickly release the insured portion of deposits is commendable, their lack of clarity regarding the uninsured portions, as well as lack of clarity on the timing of access to assets managed by SVB but not on SVB’s balance sheet, have only exacerbated fear and uncertainty, suggesting that enormous sums may never be recovered from bank accounts. It’s unclear if the commentary regarding the uninsured deposits applies to the current situation or a boilerplate warning about the consequences of any bank failing. Considering SVB credibility as a top-20 financial institution, not so different from other major banks, if regulators and policymakers allow depositors to lose any portion of their uninsured deposits, their decision will have extraordinarily negative impacts on the U.S.
The lesson that’s seeping in with every passing hour is that those who act responsibly by resisting the urge to panic at the start of a bank run will be punished, a corrosive concept. It is imperative that the federal government use this moment to teach that for those doing business with a credible bank, the cost of staying calm is, at worst, an inconvenience. A rapid response by the FDIC with clear communication, together with the support of the rest of the financial community, can send that message.
Those who stay calm during a bank run, especially depositors in a top-20 bank with more assets than deposits, should never suffer a worse outcome than those who panic, and the federal government can ensure that is the case today. The message to all depositors must be “Your bank’s assets will always be able to cover your deposits. You can access your deposits the easy way by sticking to business as usual or you can access them the hard way by panicking and forcing receivership. Either way, you’ll be fine, but the second way requires more paperwork.”
Complete and Rapid Resolution
The federal government must communicate and act quickly so that those who stayed calm weren’t stupid for doing so. At the same time, we will think twice about co-investing with investors who urged companies to participate in a bank run.
Backstopping SVB’s deposits or brokering a rapid sale of SVB to a bank with a strong balance sheet could avert a crisis. There is no moral hazard in keeping account holders whole while allowing equity and debt investors to lose their investments. The belief that checking, savings, and money market accounts are safe is a cornerstone of the economy. It is necessary for banking to work. The U.S. government should simply reinforce the notion of a safe and secure banking system – a public good if ever there was one.
Sincerely,
Kyle Teamey, Josh Resnick, Tess Cameron, and Peter Kolchinsky
RA Capital Management, LP
1. As disclosed on page 12 of SVB’s mid-quarter update here. Of the other top-20 banks, Citizen and Capital One hold 70% and 69%, respectively, of their assets in non-government backed loans. To be clear, we don’t consider that in itself risky and are only pointing out how depositors perceive what’s safe. If you support this call for rapid clarity and action with regard to the SVB receivership process, we invite you to co-sign using the form below.
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