Silicon Valley Bank failure could trigger run on US regional banks

Federal Reserve and Federal Deposit Insurance Corporation (FDIC) decisions regarding the future of Silicon Valley Bank (SVB) could affect regional banks across the United States and put trillions of dollars at risk of a bank run, said former Bridgewater director and CEO of investment firm Unlimited Bob Elliot.

In a March 11 Twitter thread, Elliot stated that nearly a third of deposits in the United States are held in small banks, and about 50% are uninsured. “The FDIC insures small deposits at all banks in the United States, but it only covers about 9 trillion of the nearly 17 trillion of the outstanding deposit base. (…) Under the hood, the coverage ratio is about 50% across most institutions, while credit unions are higher (not over).”

According to Fed data, small banks in the U.S. had $6.8 trillion in assets and $680 billion in equity as of February 2023. Given this scenario, a tech bank failure would “risk a run on thousands of small banks, “, further making the SBV situation a “main street issue,” Elliot said.

Total Assets Small Domestically Chartered Commercial Banks in the United States. Source: US Federal Reserve

Elliott’s comments were among many seen on social media channels over the weekend as fears surrounded the future of the Californian bank. A petition created by Y Combinator CEO Garry Tan claims that nearly 40,000 of all depositors at Silicon Valley Bank are small businesses. “If swift action is not taken, over 100,000 people could soon lose their jobs,” the document said, urging regulators “to step in and implement a backstop for depositors.”

According to a Bloomberg report citing people familiar with the matter, the FDIC and the Fed are reportedly discussing setting up a fund to stop more deposits at troubled banks. The fund responds to the SVB collapse and aims to reassure depositors and reduce panic.

Silicon Valley Bank is one of the top 20 banks in the US that provides banking services to many crypto-friendly venture firms. Assets from blockchain venture capitalists totaled more than $6 billion in the bank, including $2.85 billion from Andreessen Horowitz, $1.72 billion from Paradigm and $560 million from Pantera Capital.

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