If you’re thinking about starting a bank, here’s a bit of advice from a guy who’s never started one, but has read a lot of news articles recently: whatever you do, do NOT pick a name that starts with the letters S-I.
The data backs this up: 100% of major banks that failed in the last week shared this common trait. Silicon Valley Bank. Signature Bank. Silvergate Bank.
Joking aside, the events of the past several days have been unsettling. Headlines about bank failures and government bailouts have conjured specters of the Great Financial Crisis, and phrases like “contagion” and “systemic risk” are enough to make investors shake in their boots. If banks are the vessels through which the lifeblood of capital markets flows, a disease in one part of the system can cause harm to the entire body if it isn’t dealt with quickly and prudently. Furthermore, banks are generally where people and businesses park their “safe” money, whether for liquidity needs, peace of mind, or both. Any threat, real or perceived, to the security of these assets can result in sheer panic, which in turn can lead to disastrous consequences.
For all the insightful articles that have been written about SVB (the most prominent of the three bank failures) in recent days, there’s still a lot that we don’t know about the causes, and the repercussions, of the bank’s collapse. My goal in this post is not to provide an in-depth explanation of what went wrong, or to comment on whether the government’s intervention was good or bad. Instead, I’d like to highlight an uncomfortable truth that this situation reveals: while due diligence and risk management are critically important, even these measures aren’t always enough. Put another way, we should try our best to make rational, informed decisions about where we deposit and invest our money (to keep it safe, make it grow, etc.), but since we are not perfectly rational or fully informed, our decision-making is inherently limited.
In retrospect, it’s easy to identify many of the questionable decisions that SVB’s executive team made over the last few years (e.g. taking on too much duration risk in its bond portfolio when rates were near zero, designating too high a percentage of their investments as held-to-maturity (HTM), not employing a Chief Risk Officer for 8 months last year during the fastest series of rate hikes on record, etc.).
However, it’s also easy to forget how much legitimacy SVB possessed, or was perceived to possess, until it all came crashing down in less than 48 hours. Prior to its downfall, it was the 16th largest bank in the U.S. by assets. It had a 40-year track record. Its CEO, Greg Becker, was a director at the San Francisco Fed. It was featured on the Forbes 2023 list of America's Best Banks. By all accounts, it employed smart, capable people. Its stock price had enjoyed impressive growth. It was trusted by a large number of venture-backed tech and healthcare companies – companies run by some of the brightest, most respected entrepreneurs in the world. Thus, venture funds and entrepreneurs saw themselves reflected in SVB’s customers, the bank spoke their language, and it had the history and the size to back it all up.
This is, frankly, how most people make decisions about where to put their money. They rely on the guidance of trusted friends and colleagues; they look to see themselves reflected in the firm’s clients; they evaluate the size, history, capabilities, and reputation of the firm; they create relationships with people they trust.
The SVB saga has incited people to take a closer look at the security of their assets, and the firms where their assets are held. Given the potential for further displacement within the banking sector (and financial markets in general), it’s important that companies and investors re-focus on due diligence and risk management.
However, it’s also important to acknowledge that even when we make reasonably well-informed decisions with our money, things can still fall apart quickly and unexpectedly. It would be an insult to the companies and individuals who had deposited $200B at SVB to simply say “Well, they should have done more due diligence, shame on them!” Most of us aren’t actuaries or financial analysts, we don’t work at the Fed, and we don’t spend our spare time reading the 10-Ks and proxy statements of the banks where we keep our money (at least, I hope not). Though it’s frustrating to admit, our capacity to evaluate and manage risk is limited, and the lessons we learn from SVB’s collapse may not fully equip us to avoid some future financial calamity.
As I reflect on the situation, I’m reminded of the infuriating, yet insightful, quote from the Nobel Prize-winning behavioral economist Daniel Kahneman: “The world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising.”
I’ll end this note by highlighting the fact that Baird is a privately-owned, 100+ year-old company (not a bank!) that takes the security of its clients’ money very seriously. You can visit the following page to learn more about how clients’ assets are insured and protected:
And Now For Something Completely Different…
I invite you to sit back and enjoy Yunchan Lim’s masterful performance of Rachmaninoff’s 3rd Piano Concerto from last year’s Van Cliburn Competition.