March 13, 2023 - 11:59am

On Friday, California-based Silicon Valley Bank collapsed. On Thursday, customers had pulled $42 billion from its accounts, triggering a bank run. As a result, SVB’s share price plummeted and US regulators closed the bank the following day. It became the second largest banking failure in American history. This was followed by the closure of Signature Bank on Sunday, all of which pointed to a worrying contagion effect. 

Last night, UnHerd TV welcomed David Sacks, founding partner at Craft Ventures and a former member of the ‘Paypal Mafia’, to shed light on the unfolding situation. When UnHerd‘s Freddie Sayers spoke to him, it was unclear whether there would be a bailout (since then, both the Bank of England and Federal Reserve have moved to protect all deposits), but Sacks’s message was clear: the Government needed to protect depositors and needed to do so quickly if it didn’t want confidence in regional banks to collapse nationwide.

“We’re not talking about bailing out the stockholders or bondholders,” said Sacks. “We’re talking about protecting deposits in the regional banking system.” The tech investor went on to argue that a lack of sympathy for small business owners in the tech industry was bringing about “faux-populist” confusion regarding the seriousness of the situation for normal people. Many users were small business owners who had opened a standard checking account. Indeed, if depositors in SVB were farmers then there would have been no debate, he argued:

The only reason people are being stubborn about this point is because Silicon Valley Bank has the name Silicon Valley in it. If this was a farmers’ bank and it was 40,000 farms, small business farms that were on the hook, everybody would understand. The arguments being made would be: we can’t let 40,000 farms go out of business. They didn’t do anything wrong. They just trusted when they put their money in a bank that it was safe.
- David Sacks

Sacks remains concerned that events this week will damage confidence in smaller banks and lead to a further centralisation of banking in the US, with nervous CEOs everywhere deciding to move their money to the four big banks in the “trillion dollar club”:

There are two tiers of banks in the US. There are the systemically important ones, they’re too big to fail. If you put your money in that bank, it is a true deposit, you will not lose it in a bank failure. The second tier is everyone else. And if you’re in that tier, you don’t have a true deposit, it’s not guaranteed. You know what you’re doing? You’re making an unsecured loan to that bank. Now, I ask you, who would ever put their money in a tier two? Who wants to make a loan? I just want a checking account.
- David Sacks

Last night, Sacks brought us the populist case for shoring up smaller banks in America and ensuring future confidence. A federal-level rescue of depositors affected by the failure of SVB will protect them.

Unlike 2008, which basically was a failure at the top, this is basically a bottom-up failure, where it’s going to be the regional banks and the community banks that are under massive pressure. […] And the big four banks are just gonna gobble up all these deposits. […]  the big four banks are the politically connected ones. They’re the ones who have clout in Washington.
- David Sacks