Feed the Birds

‘If you invest your tuppence wisely in the bank/Safe and sound,’ the directors of the Fidelity Fiduciary Bank sing to Michael Banks in Mary Poppins, ‘Soon that tuppence, safely invested in the bank/Will compound.’ The boy, who would rather spend his money on a bag of crumbs to feed the pigeons, is unswayed^⁠ by their doggerel. The coin has to be prised from the reluctant depositor’s hand. Railing, perhaps, against familial and nominative destiny, he screams for it back, sparking a panic that turns quickly into a run on the bank.

A grimy tuppence played no role in the demise of Silicon Valley Bank. What spooked customers initially was the declaration that SVB had to realise some losses on its bond portfolio before they got any steeper. Every bank run is unique, and some more unique than others. I once covered a bank collapse in Turkey where the depositors lining up outside had assembled not to withdraw their savings but to shore up the institution by putting more in. (The bank was associated with an enemy of President Erdoğan’s: its savers were fighting a takeover they saw as politically^⁠ motivated, for motives of their own.)

More prudent risk management might have encouraged SVB to hedge its bond holdings better, but nothing about the investments was intrinsically untoward. Government bonds are meant to be the epitome of the wise old heads’ ‘safe and sound’. SVB’s wrong-way bet on rising interest rates was not, in itself, fatal. Its fatal idiosyncrasy was its customers. SVB focused its business on California’s tech industry, which made it unusually exposed to a sudden depositor exodus, and not only because faddish tech bros, convinced en masse by intermittent fasting and nootropics, exhibited the same herd mentality at the whiff of a bank run.

Unlike the bankers in Mary Poppins, hell-bent on acquiring Michael’s tuppence, SVB’s error was to confine itself to too few big clients. That a boggling 90 per cent of its deposits fell outside the FDIC guarantee in a regulatory regime that insures accounts up to the first $250,000 betrays how it focused on too narrow a slice of wealthy depositors. This meant there were fewer accounts to take flight. They knew each other, because they hung out in the same digital spaces. They had an incentive to flee. And they did more damage when they fled.