Bank Runs and Human Nature Remain the Same | Denewiler Capital

Observations on the Market //

Bank Runs and Human Nature Remain the Same

Written by Greg Denewiler, CFA® // March 27, 2023

Apparently, we will never learn. There has been much written about the current banking situation that has unfolded in the past few weeks, a financial crisis on some level. There is no shortage of opinions as to what happened and what must be done to “fix” the problem. However, capitalism cannot be “fixed”, it can only have different degrees of regulation, all of which come at a cost. Higher regulation results in lower returns, while lower regulation usually leads to more risk and increased failure rates. Somewhere in the middle lies a happy medium. Regardless of where regulation is headed, one question that hasn’t received much coverage is who has been fired over this? Maybe some old-fashioned accountability is where we should start.



The first person on the ‘should be fired list’ is Steven Louden. Steven is the CFO of Roku, a tech company that operates a TV streaming platform. On Sunday, a few days after the Friday collapse of SVB (Silicon Valley Bank), Roku announced they had about $480 million on deposit at SVB. They said the loss would not affect their day-to-day operations, but it was 10% of their assets. Let’s first ask why any company would have that much money in one bank, especially when a one-month treasury pays more than 4%. It is no stretch to assume the bank was not paying Roku 4% interest on that balance. Besides the possibility of being treated as a major bank customer (how did that work out for them?), that was just plain stupid. Under normal regulations, only .05% of that money was insured. In Roku’s press release on Sunday, there should have been a statement that Mr. Louden no longer works for Roku. Lucky for him, we the taxpayers bailed him out.



Next on the list should be someone involved in bank regulation. The Wall Street Journal reported on the events that occurred the day before the FDIC took over the bank. The bank watched as depositors started to exit the bank en masse, ($42 billion on Thursday alone), and first contacted the Federal Home Loan Bank to tap $20 billion of available credit. The FHLB had to issue debt to transfer the $20 billion, they couldn’t get it done that Thursday afternoon. SVB executives then tried plan B which was to tap a different $20 billion from BNY Mellon bank in New York. This is how the WSJ describes what happened next:



“SVB’s then-chief executive, Greg Becker, called Robin Vince, CEO of BNY Mellon, to ask for an extension. BNY Mellon agreed to try. Over the next few hours, BNY Mellon worked with SVB and Fed officials in Washington and New York who are responsible for the securities wire and entered all of the transfers to the Fed. The Fed needed a test trade to be run before the actual transfer could occur. That took time and the Fed didn’t extend its own daily deadline of 4 p.m. PT for collateral transfers to help SVB. Time ran out on the bankers and SVB couldn’t get the money that day.”



Friday morning the Fed transfer finally went through from the BNY Mellon loan funding the FHLB loan to SVB. FHLB was just waiting on a call from the Fed that the money was available, however, it was too late, and the FDIC had already decided to take over the bank. Apparently, the different agencies had no communication with each other. If there had been an announcement early Thursday that a capital infusion was coming, it may have changed SVB’s fate. We are now in a world where everything can be done instantaneously in the palm of your hand. However, regulators are still working on a timeline of days, weeks, or months. If that gap doesn’t change, more problems are coming. The markets and consumers will not wait for answers, they shoot first and ask questions later. In today’s world surely regulators should be able to talk to each other.



On Sunday morning, Janet Yellen first stated that banks will not be “bailed out,” then by Sunday afternoon all depositors were made whole (including Roku). Sounds like a bailout to me. Yellen has since stated that there won’t be any more depositors made whole above the current $250,000 FDIC insurance. That leaves all regional and smaller banks at a big disadvantage. Large banks (JP Morgan Chase, Wells Fargo, etc.) are safe, and they will be covered because they are too big to fail. Smaller banks are not so lucky.  What if you are a company with payroll and operating expenses that demand more than $250,000 be held at your local bank? Good luck. The market has not been kind to banks since SVB failed, but Jerome Powell, the Federal Reserve Board chairman, claims the banking system is sound. Meanwhile, the regional bank index declined another 5% immediately after he finished his speech. Investors are apparently not as confident as he is. Our leaders need to get their story straight, investors are not afraid to fill in the blanks.



SVB had a book value of $208/share and 12 months of net income of $1.7 billion. Besides the fact they took on more risk as a concentrated bank by focusing on technology and startups, they seemed healthy. As an investor, there will be times when mistakes happen and you can’t anticipate everything, but a portfolio of companies that produce excess cash is your best defense. Capitalism creates wealth, but it always has its challenges.


Observations On The Market No.381