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Early Lessons of Silicon Valley Bank’s Failure: 3 Links That Make You Think

Bank runs

With the worlds of finance and business poised to respond to new developments in the failure of Silicon Valley Bank (including the results of a reported regulator-led asset auction), investors around the world have already begun to adjust their worldview. Here are some early learnings, gathered from around the web.

1. This Bank Failure Was a Major Regulatory Failure

“The question following the bank’s takeover Friday: How could regulators have allowed it to grow so quickly and take on so much interest-rate risk? And it wasn’t the only problem bank last week. Just days before SVB collapsed, Silvergate Capital Corp., one of the crypto industry’s biggest banks, said it would shut down. ‘The aftermath of these two cases is evidence of a significant supervisory problem,’ said Karen Petrou, managing partner of Federal Financial Analytics, a regulatory advisory firm…. ‘That’s why we have fleets of bank examiners, and that’s what they’re supposed to be doing.’

”The Federal Reserve was the primary federal regulator for both banks. Notably, the risks at the two firms were lurking in plain sight. A rapid rise in assets and deposits was recorded on their balance sheets, and mounting losses on bond holdings were evident in notes to their financial statements.” — The Wall Street Journal, Where Were the Regulators? by Ben Eisen and Andrew Ackerman

2. The First Bank-Run to Happen at the Speed of Chat

“We all joke about [the] herd mentality, and what an incredibly tied and deep network Silicon Valley is. … Within 24 hours, every CEO and every venture capitalist was on a chat group or on a message group with other people in the Valley. And once there was any indication of panic, the entire market flipped. … At the beginning of the day yesterday: It was like, ‘they’ll get through it, it’ll be fine…’ But then it’s like, well, Founders Fund said we should probably get out. Okay, well Founders Fund is getting out. Maybe we should get out before everyone else does…. I’m getting out right now, I’m telling my best friend, I’m getting out right now. And then everyone tells their second best friend.… And then the whole Valley’s running for the door. And this is a really interesting and unique scenario. It’s not like the classic consumer run on the bank … It’s the Silicon Valley 24 hour cycle … It’s like what we’re seeing with investing cycles in Silicon Valley where everyone chases and these bubbles emerge. The reverse I think happened yesterday where the herd mentality drove us all to rush for the door as quickly as possible.”

All-In Podcast, E119: Silicon Valley Bank implodes: startup extinction event, contagion risk, culpability, and more (David Friedberg speaking @ 1:08:37)

3. The Wages of ZIRP: A Further Adverse Consequence of 13 Years of Low Interest Rates

“… If some charismatic tech founder had come to you in 2021 and said “I am going to revolutionize the world via [artificial intelligence][robot taxis][flying taxis][space taxis][blockchain],” it might have felt unnatural to reply “nah but what if the Fed raises rates by 0.25%?” This was an industry with a radical vision for the future of humanity, not a bet on interest rates. Turns out it was a bet on interest rates though.” Bloomberg, Money Stuff by Matt Levine, Startup Bank Had a Startup Bank Run

The saying that there is no such thing as a free lunch is very much true for Robinhood.