Silicon Valley Bank failure signals a big systemic problem, but not a banking crisis.

SVB's problem was not toxic assets, but toxic deposits.

Here at HardmoneyJim, my main interest is money creation and its consequences. That long-term focus usually does not require me to respond instantly to a financial blowup like the Silicon Valley Bank (SVB) failure. But in this case, I have been getting so many calls about “what this failure means” and have seen so much panic-provoking commentary that I feel I owe a brief comment to readers. I want to make three quick points.

First, contrary to the pundits (some I respect) who say that depositors with accounts larger than the FDIC limit of $250,000 are likely to lose some money, I say ”no way.” If you want to see a big bank run, just let the Treasury signal that bank deposits are not 100% safe! “They” (Treasury, Fed, FDIC) will not allow that to happen.

From all I can gather, SVB’s assets, consisting mainly of loans and government bonds, are sound (although its long-term bonds were marked down in market value). Regulators will liquidate these assets in an orderly manner. The worst case is depositors will be made whole over some period of time. In my opinion, the regulators will likely invent an additional credit facility allowing everyone access to their cash, even in the short term. Stay tuned to tomorrow’s news.

Second, the SVB failure is likely not a “canary in the banking coal mine,” signaling a blowup in the banking system. It is perhaps even more important than that. The key to seeing its significance is to ask why its depositors were so skittish that they had to withdraw $42 billion in one day. And how is that amount of money movement even possible? And why did SVB management not understand the water they were swimming in - an ocean of fragile credit supporting a speculative tech bubble? SVB is one more sign of an economy on the verge of imploding due to rising interest rates. As such, it’s in the same category as last September's UK pension fund crisis and the FTX blowup of November. Add SVB to the casualty list. There will be more.

Third, and most important to the purpose of this Substack column, SVB provides a great teaching moment that I hope to take advantage of in future posts and podcasts. If I hear one more popular writer say, “banks lend other people’s money,” as many have said in response to this incident, I might run screaming from my office. So you can bet I’ll be calling out these mistakes with special emphasis on why the public’s failure to understand money creation causes many other problems of misunderstanding with far-reaching consequences.

Till next time, then.

HardmoneyJim, March 12, 2023