Former PayPal executive, tech investor and entrepreneur David Sacks says another bank run is already underway at a second regional bank following the abrupt collapse of Silicon Valley Bank.
In a new interview with UnHerd, Sacks says he knows of at least one other bank that is already facing mass withdrawals from corporate clients.
“I already know of at least one other bank, I don’t want to say the name, but the runs have already started. It’s a regional bank and then there’s a list of other ones.
You can look and see which regional banks, their stocks were down 20% on Thursday and Friday because the market was throwing the question of whether the SVB problem would spread.”
When asked specifically whether he’s talking about customers who are already withdrawing funds in large amounts or whether people are preparing to withdraw on Monday, Sacks said the answer is both.
“Both. The thing to understand is this is more of a business banking phenomenon. I think this is less about the consumer side. The issue with business banking is that the $250,000 FDIC insurance limit isn’t really adequate for a business account.
If you think about the situation we had 100 years ago in the US before FDIC came along, is that every decade we would have panics. We would have runs on the bank all the time. It was a frequent problem. All it would really take to get started was a rumor that a bank was having problems and people would go race to get their money out and it would become a self-fulfilling prophecy. This type of thing roiled the American economy for decades until it eventually led to a bank collapse and in 1933 they implemented FDIC.”
Sachs says it’s simply safer for businesses to pull their money out of a smaller bank and transfer it to a larger, too big to fail bank, knowing the Fed is more likely to step in and offer unconditional support to a big bank that’s in trouble.
Sacks says the root problem is the fact that FDIC-insured bank accounts are only insured for up to $250,000.
“$250,000 is just not enough of an amount, so if you’re a business who banks at a bank and you have reason to believe that it might be insecure, you’re going to race to take your money out.
You have to think of the game theory here, which is that if it turns out to not be true and the bank is fine, you can just move your money back there in a couple weeks. There’s no penalty for just transferring all your money out. But if the rumor is right, you might save 100% of it.”
Global markets are waiting to see how the U.S. Treasury will respond on Monday and whether the Biden Administration will guarantee that all depositors at Silicon Valley Bank will be made whole.
SVB collapsed last week after the bank revealed $1.8 billion in losses, mainly from selling US bonds that lost much of their value due to the Fed’s aggressive rate hikes.
Treasury secretary Janet Yellen appeared on Face the Nation on Sunday, and said a 2008-style bailout of SVB is not possible.
“Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out, and we’re certainly not looking, and the reforms that have been put in place means that we’re not going to do that again.
But we are concerned about depositors and are focused on trying to meet their needs.”
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