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What could be the impact of the second-largest bank failure in US history?
05:21 - Source: CNN

Editor’s Note: Darrell Duffie is a professor of finance at Stanford University’s Graduate School of Business, and the author of “Fragmenting Markets: Post-Crisis Bank Regulations and Financial Market Liquidity,” DeGruyter, 2022. The views expressed in this commentary belong to the author. View more opinion at CNN.

CNN  — 

With the shocking failure of Silicon Valley Bank on Friday, I’m sure the lights are on late this weekend at the White House, Treasury, Fed and the Federal Deposit Insurance Corporation.

Darrell Duffie

SVB, the second largest US bank ever to go under, was hit by a garden-variety bank run accelerated by a high concentration of large uninsured deposits. Yes, there were failures of risk management and regulatory supervision. And there are likely some other banks whose balance sheets have been similarly weakened by the rapid increases in interest rates, which dramatically diminished the value of Treasuries and mortgage-backed securities. According to FDIC Chair Martin Gruenberg last week, banks have yet to recognize about $620 billion of losses in market value caused by rising interest rates.

Despite the panic over SVB’s collapse, this situation isn’t likely to morph into a broader banking crisis. Since the collapse of Lehman Brothers in 2008, the largest US banks have been forced by regulators to be much more resilient. They also rely far more heavily than SVB on retail depositors, who tend to have a greater share of their deposits covered by FDIC insurance and are less prone to run at the first sign of trouble.

Of more immediate concern is the potentially systemic impact this will have on the tech sector, which has already seen mass layoffs and investments shrivel up in recent months. Close to half of all listed US venture-backed tech and health care firms were SVB customers and many of these companies were racing to line up funds to make payroll in the aftermath of the collapse.

Given US strategic technology objectives and the broader implications for national security, the government should intervene if a significant portion of these tech firms need cash to survive.

It’s possible that may not be necessary — if most of the affected tech depositors have sufficient alternative sources of cash or can be quickly restructured in bankruptcy and continue to bring their innovations to market, then the government doesn’t need to intervene with taxpayer-funded support.

If, however, a large fraction cannot survive, then it is in the US government’s own interests to step in. It can do that in a number of different ways. The SVB catastrophe could, for example, serve as a catalyst for the government to establish a new domestic industrial development bank, as proposed by Senator Chris Coons, which could provide bridge loans to the tech industry. For some tech startups, the Small Business Administration could step in with emergency loans, as was done when Covid hit in March 2020. California and the federal government each have a Technology Modernization Fund that could potentially provide grants to keep specific types of research and development alive. But these approaches may be too slow. Many tech firms that lost access to their SVB deposits may be unable to keep the lights on for long.

There are already signs that the government is taking swift action. The FDIC, the government agency charged with SVB’s workout and insuring some of its deposits, has said that insured depositors would have access to their deposits by Monday, and that it would pay uninsured depositors an “advance dividend within the next week.”

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    But plenty more may need to be done. The tech sector is an engine of economic growth and a key element of US national security, especially given the rivalry between the US and China. If the government decides that it needs to help the tech sector through this mess, then it will need to act quickly.