A “liquidity squeeze.”
It’s not the latest trendy juice cleanse. It’s the state of affairs that took down Silicon Valley Bank last weekend.
So what is it? What does it mean for you? And perhaps most importantly, how do we prevent it from happening again?
“The depositors wanted their money now,” University of Michigan professor Erik Gordon told WWJ. “The assets the bank had to pay the depositors their money were not so liquid. It’s not something you can just sell right away. And what caught the bank was to sell the assets all at once, they had to sell them at a discount, which meant the bank didn’t have as much assets, as much money, on hand as people thought it had.”
Once word got out, it started a panic among depositors.
“Nobody wanted to be the last in line and not get paid,” Gordon added. “Within a couple of hours, $40 million of deposits were withdrawn.”
Gordon went on to explain why the circumstances at SVB are rare and unlikely to affect a vast majority of bank customers because most banks have diversity among their customer base between established and new business models whereas an overwhelming number of SVB’s clientele were startup companies.
“I can’t think of any bank that’s as focused as SVB [on startups],” Gordon said, “which is one reason I don’t think this is going to be a widespread problem.”
These startups, mostly in the tech sector, were also a large part of Signature Bank’s client base, and Professor Paul Vaaler of the Carlson School of Management told WCCO that the volatility of tech also caused Signature’s downfall.
“That’s what links the two of them to the collapses of both,” Vaaler said. “And we have to wait and see what the FDIC and the [Federal Reserve] and the President are going to do to essentially build confidence that investors and depositors and other stakeholders in these two banks are going to get a fair deal.”
As for how to turn SVB and Signature’s collapses into an isolated occurrence rather than an epidemic, the consensus appears to be as simple as better management strategies than what those two institutions employed.
“To think that they didn’t even have a risk officer in place for most of 2022 is really just unfathomable for any analyst I think,” Dave Simmons, host of KMOX’s “Dollars and Sense,” said. “Could we see a domino effect? At this point… this looks to be a contained, isolated incident in terms of both banks. But we’re still watching and waiting with some concern of course.”
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