Raise the cap on deposit insurance and train more competent bank examiners.
Silicon Valley Bank’s failure rattled confidence in small- and mid-sized banks across the U.S. and once again ignited cries to more tightly regulate banks.
That’s wrong-headed. We need to step back and examine how non-money center banks, which are essentially depositories, get into trouble and better apply the tools we have. Promising startups often attract funding in large bursts — initial seed capital and then cycles of private share sales — and deposit considerable sums at banks to cover expenses as they develop. They don’t borrow a lot relative to those deposits.
On March 8, SVB announced a new stock offering to raise cash but on March 9, bank stocks had their worst day in almost three years. SVB stock lost 60% of its value. Peter Thiel’s Founders Fund and other venture capital funds advised their portfolio companies — the startups — to move their money, and the run on the bank became a torrent. This was hardly surprising because 94% of SVBs deposits exceeded the $250,000 cap. SVB tried to raise funds to accomodate the requests, but failed.
Since 2006, Federal Deposit Insurance has been risk based, with premiums set according to the quality of assets on bank balance sheets.
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