SVB: The first digitally fueled bank run; A bailout by any other name; Tech will learn nothing; The Fed is battling a problem of its own making.
Going cashless really does make people happier in China! PROOF!
1. SVB the first digitally fueled bank run
2. SVB: a bailout by any other name
3. Tech will learn nothing from the SVB failure!
4. Going cashless makes people happier in China!
5. INTERVIEW: The Fed is battling a problem of its own making!
Artwork: Sorry no artwork tonight just Dall-E’s impression of SVB on TV going down in flames with “shocked” onlookers. I think Dall-E captured the moment nicely!
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1. SVB the first digitally fueled bank run
Silicon Valley Bank has the dubious honor of being the first Twitter-powered digitally fueled bank run!
This article will help readers understand the social media component of the bank run: here
If the global meltdown in banking stocks isn’t scary enough, here’s more! Silicon Valley Bank has two dubious firsts! It is the first social media-fueled bank run and the first one where digital cash transfer was used to kill off a bank in record time!
Meme bank runs?
Social media’s dubious use in promoting “meme stocks” is legendary, now, social media is taking a far darker turn by creating a “meme bank run.” Social media played a major part in the SVB collapse fueling a run many now regret.
While Peter Theil’s warning to take deposits out of SVB was the nail in the coffin for the bank (lawsuits are coming), he wasn’t the first to take to Twitter!
The first tweet to start the panic came from Evan Armstrong, writer of the newsletter “Napkin Math” read by VCs. On Feb 23, he tweeted: “Also in today’s newsletter: SVB was, based on the market value of their assets, technically insolvent last quarter and is now levered 185:1.”
The use of Twitter to spread panic isn’t new, but it is the first time that it’s been tied to a bank run, and while it may be the first but it will undoubtedly not be the last!
Speed kills!
The next step that made this run uniquely digital was when depositors cleaned out $42bn in 24 hours through online banking access. Funds flowed out of SVB at $500k a second! Let’s face it they weren’t standing in line waiting for tellers to count cash!
For comparison, during the Washington Mutual bank run of 2008, $16.7 bn flowed out over 10 days. A former US bank regulator commented that in prior runs, bank execs called the Fed on the phone to warn them! This is a new ballgame. Who had time to call the Fed?
The speed of SVB’s fall is instructive! Bank runs are a major concern with CBDCs, but as SVP shows CBDCs are not needed to clean out a bank!
Now that the crisis has passed, some lament the loss of SVB, stating that VCs should have banded together to persuade customers to keep their funds in the bank.
48 hrs before the Fed stepped in, 500 VCs signed a statement encouraging companies to keep using a recapitalized SVB.
How viral was that message compared to a Twitter-fueled mass panic?
Takeaways:
—SVB shows how destructive a social media panic can be, and I expect this is the new normal.
—With massive cash outflows, bank restructuring is impossible; there is no time to do anything but shut it down.
—Meme Stocks were odd but amusing; meme bank runs are far darker.
—What happens when they cause panic and are wrong?
—Expect “circuit breakers” to halt bank runs in the future, just like we have with stocks.
2. SVB a bailout by any other name
Silicon Valley Bank not a bailout, but losses from the new loan program will be passed to banks….who will pass them to you!
I made a PDF with headlines and key passages accompanying the bullet points below. Sadly there is not enough room on substack for all the pictures.
Download key passages with article links: Here
So now we have the “Bank Term Funding Program” (BTFP), where FDIC Deposit Insurance funds will be used for collateral-backed loans to failed SVB and Signature bank. Banks will pay any losses made by BTFP in what we assume are additional FDIC premiums. Then who pays? You do!
Bailout or not, this much is true about the entire world of VC that SVB exemplified: “We’ve got “rugged individualism and capitalism on the way up, privatizing the gains, then ‘we’re all in this together’ on the way down.” (Galloway FT see PDF for link)
There is so much going on. All I can come up with in this article are some highlights and great reads.
There’s a lot more to this story, so forgive me if my list is incomplete and my writing less focused than normal:
• You will indirectly pay for the losses: When the gov’t says banks will pay, that means you will. Not in the near term, but banks won’t take additional FDIC fees lightly and will pass them on to you. So next time you meet a VC proud of his/her unicorn ask what you got out of it!
• Not a bailout, or is it? Stock and bondholders in SVB and Signature will get nothing so. Clearly, they are not bailed out. Depositors, including the VCs who fueled the bank run, however, will get their deposits back. So in my view it’s 50/50? The collapse of start-ups across the globe isn’t in anyone’s interest, but some of the VCs are hardly worthy of government largess.
• A US problem: A unique US implementation of Basel 3 and a Trump-era roll-back of Dodd-Frank regulations both contributed to SVB insolvency. SVB even lobbied for them! Were these regulations implemented, many speculate that disaster could have been avoided or at least been much slower. Who knows?
• Speed of bank run: $42bn moved out of SVB in 24 hrs! Wow! Welcome to the digital world, and I don't think CBDCs could have moved the money much faster. The speed is the result of digital tech, and the bank run was caused by the very VCs that rely on SVB!
• Crypto banks in trouble: That neither Signature nor Silverlake could find investors speaks volumes about crypto banks. These were the two most crypto-friendly banks and provided fast payment networks used by the industry. Note this is not crypto custody. Crypto is being cut out of the banking system.
• Stablecoins: Many claim that stablecoins are fine. It’s the banks that are the problem. No, the stablecoin mechanism isn't stable and needs work. Perhaps the “narrow bank” structure floated in the US would be better?
• Impact on fintech innovation: Yes, fintech will keep innovating, but I expect the VC funds to be far more skittish in the coming months. Perhaps a pause for a few quarters? No one knows. We’ll have to watch and see.
Takeaways:
—The Fed kept rates at zero for years and is now fixing the problem it created!
—The speed and social nature of this bank run are new!
—We will all pay for the bank lobby's success in getting regulations relaxed!
3. Tech will learn nothing from the SVB failure!
"'They will learn nothing from this': Tech leaders remain staggeringly oblivious to the true lessons of Silicon Valley Bank."
The week’s best read on the SVB crisis: here
🔥The best read of the week on SVB!🔥 Linette Lopez explains how, with all the blame passed between regulators, bank execs, rating agencies and the Fed, “none of these grown-ups take any of the blame on themselves."
It was the CULTURE!
“SVB imploded in part because it was a repository for the riskiest behaviors of the industry it serviced. Its growth was supercharged by tech's clubby, insular nature, and its operation depended on a rising tide that was always sure to go out.”
But SV hasn't learned:
"In the long run, SV's unwillingness to reckon with this mess and its role in it means that its culture of mindless growth will endure. And alongside (or instead of) getting real innovation, we'll get another bubble of chasing fads and nonsense."
Worshiping tech gurus as the “smartest guys in the room” hardly seems fitting. It was SVB's job to understand basic risk management, and tech CE/FOs’ job to diversify risk.
Some argue that tech founders don’t necessarily need to understand finance. Bunk! Leaders of these companies were showered with cash for their genius yet didn't understand the most fundamental risk to their company?
While smaller companies might be forgiven, where were the “smartest guys” when major players like Circle ($3bn of $40bn remained), Roblox ($3bn), and Roku with ($487bn) put their money into a high-risk bank. Is Circle, a finance co., smart?
Former FDIC chair Sheila Bair said it best: “The uninsured depositors of SVB are not a needy group. They are a “who’s who” of leading venture capitalists and their portfolio companies. Financially sophisticated, they apparently missed those prominent disclosures on the bank’s websites and teller windows that FDIC insurance is capped at $250,000.”
Consider these passages carefully:
“The collapse of SVB should be an opportunity for tech cheerleaders to take a step back and reexamine their place in the world. For years, the leading lights of venture capital have offered up their ideas on how society should be run."
“In an ideal world, there might be a tone of contrition from the people who just flew billions into a mountain betting on ZIRP and crypto. The meltdown of the tech industry could serve as a reminder that VCs are just a club of people, taking risks in tech — that they don't have the answers to every problem in our society. But I'm not holding my breath.”
"Do not expect any apologies from the leaders of Silicon Valley."
4. Going cashless makes people happier in China!
Mobile payments and going “cashless” really do make people in China happier!
Download article and “happiness” research: here
“The Conversation” delivers a straight-shooting article on why mobile payments are making China happy and, by extension, why there is far more to mobile payments than first meets the eye!
Author’s note: I selected this article because it talks about happiness instead of SVB, which is far too depressing!
Analyzing data from the 2017 Chinese General Social Survey, the authors found that mobile payments were associated with a 0.76-point increase in happiness in rural China. Happiness was measured on a 5-point scale! (see attached paper)
In striking contrast, city dwellers showed no changes in happiness. The cause of this discrepancy is likely their existing access to financial services.
The study found other benefits:
🔹 Improvement in quality of life:
Chinese residents are used to reducing their consumption to cope with future uncertain events and risks, which leads to a decline in quality of life. Mobile payments make it easier for residents to acquire goods and services.
🔹 Reducing transaction costs:
Traditional non-cash payment methods such as credit card or cheque payment have large transaction costs and have additional costs from wasting time, traffic, communication, and information acquisition.
Mobile payments can help reduce costs on essentials like food bills. In earlier research, mobile payment users in China spent 2,347 yuan less on food each year.
🔹 Stimulating entrepreneurship:
Microcredits are simpler and do not require collateral, saving entrepreneurs the cost of obtaining a bank loan, reducing financial constraints on families and providing incentives to start a business.
🔹 Increasing social interaction:
Mobile payments increase the frequency with which people participate in social networking. Relying on the Internet platform, mobile payment provides people with an effective means of communication and social contact.
🔹 Financial inclusion:
The happiness effect of mobile payments was valid for some socially vulnerable groups, such as elderly individuals, rural residents, the low-educated, and low-income households.
🔺The downside:
Mobile payments significantly increase the probability of household over-consumption, which is negatively related to the happiness of householders.
Takeaways:
—Going cashless does bring happiness!
—Access to digital finance for rural and vulnerable populations is a game changer.
—Over-consumption is a real problem.
—If going “cashless” makes people happy, is there any wonder why China is building a CBDC?
5. The Fed is battling a problem of its own making!
No, this is not a replay of the 2008 Global Financial Crisis but “The Federal Reserve is battling a problem that it made!”
The first part of a two-part interview.
A short post tonight and an interview I did for CGTN with senior editor Abhishek G Bhaya. In these comments, I try to dial back the fear levels but am critical of the Fed.
Yes, SVB is terrible, but no, this isn’t a repeat of 2008, and people should remain calm.
The good news from yesterday was that eleven of the largest US bank announced a $30bn rescue package for First Republic Bank. Republic’s shares dropped 60+% on Monday.
That the banks saw this as imperative and the gov’t didn’t have to step in is a positive development. I don’t argue that this dialed up the fear levels, but I still don’t see this as a replay of 2008.
Part 2 of the video is available below. In it, I talk about how this is the world’s first digitally fuelled bank run.
Link to second half of the video where I talk about how this was a bank run fuelled by digital. Digital panic spread on Twitter and digital cash transfers did in SVB in record speed! Here
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Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is number 4 on Onalytica's prestigious Top 50 Fintech Influencer list and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.
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