The potential collapse of Silicon Valley Bank (SVB) has caused alarm among regulators, investors, and depositors alike, with experts warning that the fallout could extend far beyond the tech bank itself. The Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) have been closely monitoring the situation and considering their options, but there are growing concerns that any missteps could have serious consequences for small banks across the United States.
According to Bob Elliot, a former Bridgewater executive and CEO of investment firm Unlimited, nearly a third of all deposits in the United States are held in small banks, and around 50% of these deposits are uninsured. While the FDIC does insure small deposits in all banks in the US, this only covers about $9 trillion of the nearly $17 trillion of outstanding deposit base. Under the hood, the coverage rate is roughly 50% across most institutions, while credit unions are higher.
With small banks in the United States holding $6.8 trillion in assets and $680 billion in equity as of February 2023, the failure of a major institution like SVB could trigger a chain reaction that puts thousands of small banks at risk of a run. As Elliot points out, this is not just a Wall Street problem, but a “main street problem” that could have serious implications for businesses and individuals across the country.
These concerns have been echoed by others in the industry, including Y Combinator CEO Garry Tan, who created a petition urging regulators to step in and implement a backstop for depositors. The petition notes that nearly 40,000 of all depositors at Silicon Valley Bank are small businesses, and warns that over 100,000 people could lose their jobs if swift action is not taken.
In response to these concerns, the FDIC and the Fed are reportedly discussing the creation of a fund to backstop more deposits at troubled banks. This fund would respond to the SVB collapse and would be intended to reassure depositors and reduce panic. While the details of this fund are still being worked out, it is clear that regulators are taking the situation seriously and are actively looking for ways to mitigate the potential risks.
Silicon Valley Bank is one of the top 20 largest banks in the United States and provides banking services to many crypto-friendly venture firms. The bank’s collapse would be felt throughout the industry, with assets from blockchain venture capitalists totaling more than $6 billion at the bank. Some of the largest investors include Andreessen Horowitz with $2.85 billion, Paradigm with $1.72 billion, and Pantera Capital with $560 million.
The future of Silicon Valley Bank is still uncertain, but what is clear is that the decisions made by regulators in the coming days and weeks will have significant consequences for the banking industry as a whole. As Elliot warns, the potential risks extend far beyond SVB itself and could put trillions of dollars at risk if not handled carefully.