Silicon Valley Bank was aptly named: It held the funds of hundreds of U.S. tech companies and was a crucial player in the valley’s economy. But on Friday, it became the second largest bank failure in U.S. history after a rapid run on its deposits. Some $175 billion in customer accounts were taken over by the Federal Deposit Insurance Corporation (FDIC), which is now tasked with returning money to the bank’s customers.
But more than 85% of the bank’s deposits were uninsured, according to estimates in a recent regulatory filing. That’s because FDIC deposit insurance is meant for everyday bank customers and maxes out at $250,000. Many Silicon Valley startups had millions, or even hundreds of millions of dollars deposited at the bank—money they used to run their companies and pay employees. Right now, nobody’s sure how much of that cash is left.
The tech sector was already wading through a harsh macroeconomic climate, with layoffs abounding and stock prices sinking precipitously. Silicon Valley Bank’s downfall is likely to exacerbate those problems—and could threaten the wider economy. “It’s like a Lehman Brothers moment for Silicon Valley,” says one Silicon Valley startup founder whose company has millions of dollars tied up in SVB. “It feels like something that never should have happened, because it’s such a trustworthy entity.” The person spoke on the condition of anonymity because they are worried about losing customers over their ties to SVB.
Insured to $250k means exactly that. The taxpayers should not be on the hook for anything above that. Does it suck for the depositors? Absolutely. Is it tragic for the people who won’t get paid next week because the money is gone? I can’t imagine the stress. It sucks. It all sucks.
But terms are terms and contracts are contracts. We have to stop the madness of thinking that the American taxpayers will ride to the rescue every time bad things happen in the private sector. There is too much money in the economy chasing too few goods. Hence, inflation. While it sucks, the evaporation of billions of dollars out of the economy is a necessary evil to stymie the larger evil of inflation. I continue to contend that the best thing would be for the federal government to cancel much of the inflationary spending, but absent the political will to do that, the private sector will have to contract to let the air out of the inflationary bubble.
Warning to all. If you have more than $250k in a bank, you should spread your money into multiple banks or accept the risk.