Bank panic: Is the Silicon Valley collapse unique or a sign of more to come?

We had an old-fashioned run on a major U.S. bank on Thursday. The bank died, and Wall Street held its breath, hoping this wasn’t contagious.

The run on Silicon Valley Bank wasn’t like bank runs in the early 1930s Depression, when panicked depositors lined up in New York and Philadelphia to retrieve their life savings, only to watch the banks run out of cash and shut — sometimes forever, leaving them broke.

Deposit insurance has mostly eased that problem, at least for those of us with less than the federal insured limit of $250,000 in our accounts.

And yet, on Thursday, depositors couldn’t get their money out of Silicon Valley Bank fast enough. Systems crashed; reserves drained. On Friday morning, state and federal regulators stepped in, closing offices from Silicon Valley’s Santa Clara headquarters to its local outpost in West Conshohocken. Regulators will spend the weekend trying to fix what’s left.

Silicon Valley was the 16th-largest U.S. bank, and it played an outsized role in financing emerging technology companies. Biotech hopefuls in the Philadelphia region that it helped and hoped to profit from include Aclaris, Immunome, Orchestra BioMed, PhaseBio, and Triduum. A Philadelphia-area investment firm on Friday told associates that some of the tech companies it backs had accounts at the failed bank, and they are reviewing the impact of its takeover.

What fed the particular panic: the bank’s announcement it had lost $2 billion as bonds it owns lost value due to rising interest rates. That’s a lot for you or me or the state government, but just a small fraction of the bank’s $175 billion in total deposits. The bank had said it was ready to sell the bonds at a loss and replace the losses, as healthy companies do, by selling more shares, anticipating good times and high profits will return.

And even if they couldn’t, why panic? Aren’t bank deposits insured? Not at Silicon Valley, it turns out.

According to this unusual bank’s Dec. 31 annual report, about $165 billion in Silicon Valley deposits — which is to say, most — was not insured by the Federal Deposit Insurance Corp. Some of that money was foreign, but most was presumably in the accounts of Silicon Valley customers, borrowers, and others who stashed their cash, including millions in investors’ funds, with their bank.

The picture has changed since that report, and the FDIC said Friday that it wasn’t sure how much of Silicon Valley’s money was currently uninsured.

Of course, most deposits aren’t sitting in the bank; they’re lent to other customers. That’s what banks do. The system worked well in good times when it was easy for promising software and biotech companies to sell shares, pay back loans, and hopefully turn a profit, or get sold for a fat premium, after a few frenzied years of financing and product development.

But this time customers stopped trusting Silicon Valley. They remembered their deposits weren’t insured and under pressure after months of rising business costs and the weak stock market. They were finally rattled by the bank’s unfortunate announcement at a vulnerable time and ran for the cash on hand — which wasn’t enough for everyone.

As depositors lost confidence, the stock dropped lost most of its value, then stopped trading. Other bank prices fell, too, as if traders were wondering which bank will be next. Banks of many sizes (though not all banks) have large piles of bonds that won’t be worth what they paid for them if they are forced to sell, as Silicon Valley was.

Tom Gordon ran the bank’s West Conshy office and is held in high esteem by the local biotech crowd. When I asked about the companies he helped build and what could happen next, he said he’d like to tell more, “but as you can imagine, I am just not able to.”

The FDIC, which often arranges shotgun sales for smaller banks in trouble, found no ready buyer this time and instead set up a temporary successor, the National Bank of Santa Clara, to service Silicon Valley’s insured deposits, which it promised will be available Monday morning.

The apparently much larger crowd of uninsured depositors will get some money — “an advance dividend” — next week, along with a “certificate for the remaining amount of their insured funds.” Then the agency will sell Silicon Valley’s assets.

Depending on how those sales go in this slow economy, future paybacks to companies and other depositors “may be made,” the FDIC concluded.