Any disaster – be it a plane crash or a nuclear plant meltdown – is subsequently found to be caused by multiple failures. The Silicon Valley Bank (SVB) demise is no different. Who is to blame and what does this mean for the safety of your money in your bank or brokerage account? Here’s my view of the situation.

SVB: Poor risk management. Too many depositors wanted their money withdrawn at the same time. This is called a bank run and can happen at any bank if depositors get spooked for any reason. But in SVB’s case we’re talking 40 billion dollars in one day thanks to today’s push-button electronic banking and the fact that the vast majority of SVB’s depositors were startup companies holding big cash deposits. In order to meet excess withdrawal demands banks have to either quickly liquidate assets or raise capital. SVB had concentrated its investments in long-term treasury bonds whose value had been decimated in 2022 due to the rapid rise in interest rates. So selling assets would have resulted in huge losses and might not even have covered the bank’s cash needs.

The Federal Reserve: Poor interest rate management, poor bank supervision. Although hindsight is easy, it’s fair to say that the Fed found itself well behind the inflation curve in 2021 and consequently launched the most aggressive interest rate hikes ever seen, which put many banks under stress. In addition, SVB had already been on the Fed’s bank regulator radar. The Fed had issued citations to SVB in 2021, partly involving its ability to raise cash when under stress. And SVBs management had been rated deficient in mid-2022. But beyond that the Fed took no action until the crisis occurred.

The Federal Government: Poor regulations limiting banking risk. The “too big to fail” mantra has been embedded in federal government banking policy ever since 1984 with the failure of Continental Illinois bank. This creates a moral hazard where banks know that if they take on too much risk the government will bail them out instead of allowing them to go bankrupt. Typically either by buying bank-owned securities with unrealized losses at par (which improves the bank’s balance sheet) or by helping arrange for more capital such as what happened recently with First Republic Bank. Axel Merk at Merk Investments argues that this turns an acute problem into a chronic one. His proposed solution is twofold: (1) require banks to value assets on their balance sheet at true current value (called Mark to Market) rather than at maturity value, the same way brokerages have to do it. That would make it more obvious which banks are at risk of a potential capital shortage. Also (2) require banks to have to refinance 10% of their capital each year by holding ten-year staggered subordinated debt. This solution puts market forces more in control of banks and had been originally proposed in a Federal Reserve research paper as far back as 2001. If a bank is unable to refinance at acceptable costs, it would shrink by ten percent. As Merk puts it, ten percent shrinkage is absorbable, fifty percent is not.

Is your money safe? Yes for most Americans except the ultra-wealthy. FDIC insurance protects up to $250K cash for each type of account in banks ($500K for a joint account). SIPC insurance covers up to $500K cash and securities for each type of account at brokerage firms. And the Biden administration has committed to covering all cash losses at SVB, effectively making FDIC coverage limitless (although a future administration might not act the same way). After interest rates stabilize things will probably settle down. But the long-term solution to excessive banking risks remains elusive.