SVB Doesn’t Deserve a Taxpayer Bailout

Ignore Silicon Valley fear-mongering about bank runs. This is a simple case of bad risk management.

Treasury Secretary Janet Yellen announced Sunday evening that Silicon Valley Bank’s uninsured depositors would gain access to their deposits on Monday. The Federal Deposit Insurance Corp. insures only deposits up to $250,000. The bailout creates incentives for risky behavior, teaching large depositors that they can throw money at risky banks without diversifying or conducting diligence. SVB long lobbied for looser risk limits by arguing that its failure wouldn’t create systemic risk and thus didn’t merit special intervention by the U.S. government. Yet on Sunday, Treasury deemed SVB “systemically important.”

SVB’s situation is different from that of most U.S. banks. Only 11% of its deposits were insured. While the operating accounts of small businesses often exceed the FDIC limit, large banks usually sweep the excess into cash-management programs that buy Treasury bills and other securities. As the nation’s 16th-largest bank, SVB simply chose not to do so. For some reason Roku, the publicly traded maker of streaming devices, had a $487 million balance with the bank.

SVB also had a concentrated client base of tech startups whose needs for capital were highly sensitive to rising interest rates. Yet SVB itself had the highest concentration of any major bank in mortgage-backed securities, also especially sensitive to that risk factor. This is an egregious oversight specific to SVB. Its investment portfolio was 57% of total assets, more than twice its peer average of 24%.

SVB intentionally decided not to hedge its interest-rate risk. This is shocking given that its $120 billion securities portfolio had a duration of 5.6 years, meaning a 200-basis-point increase in the five-year rate would equate to a $14 billion loss, roughly equal to SVB’s entire capital base.

Either SVB was incompetent or this is a case of moral hazard, taking excessive risk and expecting political favors and bailouts. It turns ot SVB’s real “hedge” was to curry favor with the Biden administration.

Silicon Valley entrepreneurs want to move fast and break things, but we shouldn’t let them break public trust as a long-shot maneuver for a special bailout. That isn’t how capitalism works.

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