Is any bank small enough to fail anymore?

In a blink of an eye, it was over. For a minute there, it seemed like the collapse of Silicon Valley Bank was going to consume us. Now, just a few weeks later, we have moved on. According to Google Trends, however significant the 2023 bank crisis seemed to be in the moment, that moment has passed.

The specter of the 2008 global financial crisis was hard to ignore when federal regulators closed down Silicon Valley Bank on March 10th. Indeed, the 2023 bank crisis had many elements of the 2008 crisis. The shutters of fear rippling through financial markets. The failure of a highly visible institution and rumors about which might be next. The debates over the urgency of federal intervention to stanch the risks of contagion spreading across the financial system balanced against the outrage at the prospect of bailing out fat cats. Then, after the fat cats are bailed out and the dust settles, the political retribution against those who did what needed to be done.

In 2008, that sequence of events took several years to play out, while this time around, it was all over in a matter of days, except for the political retribution. Early in the week of March 6th, we heard there were funding problems at Silicon Valley Bank. On Wednesday, the crisis accelerated. By the end of the day Thursday, led by venture capitalists who urged the early-stage companies they had funded to pull their money out, the largest bank run in history was on. By the end of the week, SVB was shut down by bank regulators, and the debate on the importance of preventing contagion, even if it meant bailing out the fat cats, roiled the Internet.

The backstory is fairly succinct. Silicon Valley Bank was unlike any other commercial bank in the country. It was founded forty years ago to meet the needs of startup companies, and for decades had a symbiotic relationship with Silicon Valley’s leading venture capital firms. Venture capitalists urged their start-up and early-stage portfolio companies to keep their funds in SVB, and SVB in turn maintained a multi-billion venture investment unit that held equity stakes in those same companies, as well as in the venture capital firms themselves. As venture capital funding exploded over the past half-decade, growing from $90 billion in 2017 to $345 billion in 2021, SVB kept pace, with deposits growing from $49 billion in 2018 to $189 billion in 2021.

Before its collapse in March, SVB’s ten largest depositors had an average of $1.3 billion parked in SVB, and only 7% of SVB’s deposits fell within the $250,000 limit covered by FDIC deposit insurance, compared to upwards of 60% at most commercial banks across the country. In sum, SVB was a major player in the closed, incestuous Silicon Valley world, where venture capital rules, and billionaires help other billionaires create new billionaires.

It remains unclear why a handful of leading venture capitalists turned on Silicon Valley Bank. For years, venture capitalists had directed their portfolio companies to use SVB as the depository for their funds. One would have expected that those venture capitalists — touted far and wide as among the most brilliant financiers on the planet, and with billions of dollars of client funds at stake — would have paid attention to issues SVB was facing as the Fed was increasing interest rates. After all, the challenges facing commercial banks as rising rates were translating into losses on their bond holdings had been written about months earlier in the Wall Street Journal, and this past November JPMorgan raised specific concerns about the impact on Silicon Valley Bank.

And it is hard to imagine that there weren’t solutions to the problems Silicon Valley Bank was facing. As one SVB insider suggested, one would imagine that any number of sovereign wealth funds would’ve been happy to take a piece of Silicon Valley Bank and in doing so secure its place as a player in the most dynamic economic region on earth. Yet somehow it all came tumbling down, when rather than fix the problem, leading venture capitalists in the Silicon Valley chose to cut and run.

As the run on Silicon Valley Bank began to gain steam that Thursday, those same venture capitalists and hedge fund gurus took to social media to demand that the federal government step in and fix the situation. The irony was lost on no one, as a cabal of erstwhile libertarians, who had long lectured the nation on the evils of government regulation, thought of every excuse under the sun why the federal government must immediately step into the breach.

They were not just pleading for a bailout; they were demanding one. Not for Silicon Valley Bank, mind you, but for themselves. It turns out they had little interest in whether SVB survived — or they would have fixed the problem themselves — but they had a huge financial stake in protecting the billions of dollars of deposits their portfolio companies had tied up in those uninsured accounts. As one observer put it, every libertarian becomes a socialist the moment the free market screws them.

Early that Saturday morning, hedge fund billionaire Bill Ackman threw down the gauntlet: Jerome Powell and Janet Yellen had 48 hours to guarantee all of the deposits in Silicon Valley Bank or there would be a run on the entire banking system, leaving no banks in the country standing save the four largest banks, which have been deemed “too-big-to-fail” since 2008, and where the government effectively guarantees all deposits

And he was right. In the early moments of the crisis, many observers — including former Treasury Secretary Larry Summers and hedge fund superstar Ken Griffin — presumed that SVB had the perfect profile of a bank that could be allowed to fail without significant risk of contagion, given its narrow regional and industry focus. But that turned out not to be the case. Unlike 2008, when the contagion that came close to cratering the global financial system was a product of the very real linkages among mortgages, mortgage-backed securities, and mortgage-based derivatives that fell apart when the housing market went south, contagion this time around was as much a behavioral phenomenon as a financial one.

As rumors of the run on SVB rocketed across the Internet on March 9th and 10th, individuals thousands of miles away watched the crisis unfold in real-time and wondered how they could be sure their own bank was safe. And many of them decided not to wait to find out. At that moment, we learned that the nature of contagion had changed, as the impact of the collapse of Silicon Valley Bank was both immediate and severe. In the blink of an eye, hundreds of billions of dollars were drained from regional banks nationwide

Then, as suddenly as the 2023 bank crisis burst onto center stage, by Sunday March 12th it was over. Using their authority to waive the limits on FDIC deposit insurance in the face of what they deemed to be a systemic threat to the financial system, Powell and Yellen did what Ackman and others had demanded and guaranteed that all depositors at Silicon Valley Bank would be made whole.

Call it what you will, sound judgment or capitulation, but Powell and Yellen waved their magic wand, the sense of crisis dissipated, and people began to move on. Was it a bailout? Of course it was. Yellen publicly insisted that they did not bail out Silicon Valley Bank, but that was just a matter of semantics. SVB shareholders may have lost out, but depositors who had no legal right to be protected from financial loss got their billions back — including those who instigated the run in the first place. Given that essential fact, it is disingenuous to suggest otherwise.

The political retribution was swift and furious. Critics on both sides of the aisle piled on, blaming federal regulators for being “asleep at the wheel” for failing to identify the problems at Silicon Valley Bank early on. Yet that turned out not to be the case, as for more than a year federal bank regulators had repeatedly and with increasing urgency warned SVB management of the risks it faced in a rising interest rate environment. Management, the bank board of directors, and the venture capitalists were all culpable for SVB’s collapse, but only the VCs walked away unscathed.

In the wake of the collapse of Silicon Valley Bank, Bernie Sanders returned to the themes of the 2008 crisis and the outrage at once again seeing those who had done so much to instigate a crisis reap a financial windfall from its resolution. For Sanders, that meant doubling down on his insistence that commercial banks should be broken up to put an end to ‘too-big-to-fail.’

Looking back at events in March, however, it’s hard not to reach the opposite conclusion. As deposits flowed out of regional banks on March 9th and 10th, much of the money withdrawn from small regional banks flowed into JPMorgan Chase and Citibank. Many of those who had followed the collapse of Silicon Valley Bank on their laptops and smartphones, and feared that their bank might be next, chose to transfer their money to banks that the federal government had officially confirmed would not be allowed to fail.

As it turned out, this time around too-big-to-fail banks were not a part of the problem, but instead part of the solution; for panicked depositors at least. While FDIC insurance may officially be limited to $250,000, the public knows full well that the nation’s largest banks will be bailed out come hell or high water. Therefore, for those banks, federal deposit insurance is effectively unlimited.

In today’s world, where people can move their money instantaneously from apps on their phones, it should come as no surprise that as soon as news broke of the collapse of a little known bank, hundreds of billions of dollars were moved nearly instantaneously to those banks people knew would never be allowed to fail. The confluence of social media, smartphones, and financial technology have become the new catalysts for contagion, and a central question arising from the 2023 bank crisis is not whether we need to get rid of banks that are too big to fail, but whether the small-enough-to-fail banks of Bernie Sanders’ imagination have ceased to exist.

Artwork by Joe Dworetzky. Follow his cartooning on Instagram at @joefaces and his journalism at authory.com/JoeDworetzky