Comment by SilverBirch | Hacker News Reader

Comment by SilverBirch | Hacker News Reader

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It's pretty well understood that no bank can really withstand a complete bank run. It's simply not how banks are currently designed to be able to always and forever be able to return 100% of cash at a moments notice. And there's good reason for this, if you always need to have 100% of deposits ready at 60 minutes notice you're pulling a whole bunch of investible capital out of the economy and just sitting on it unproductively. So pretty much any bank that suffers a bank run is going to have to fire sale assets to produce liquidity, and often when that happens other banks will refuse to buy since they're afraid of being the next victim of a bank run. So very quickly this turns into a game of hot potato.

What's unique about SVB though, is that despite it being a relatively large regional bank, a handful of its customers - tier 1 VCs have enough clout to force a bank run. These VCs have created a situation where their entire portfolio of companies depend on SVB, and as a result if they say "Get out of SVB" they can cause massive disruption. What's really funny about this though, is that these VCs -aware that this is the case - don't decide "Better be super careful about dealing with SVB and slowly diversify to de-risk this massive systemic risk to their industry. No, instead what they do is they execute the exact bank run they know will massively damage their industry.

To put it in historical context, this is like if JP Morgan, instead of gathering institutional leaders and co-ordinating a calm and orderly response to a crisis had run on to twitter and screamed "IT'S ALL GOING TO ZERO GRAB YOUR CASH NOW".

I can equally see a scenario where someone on Facebook or Twitter says "Get out of Wells Fargo" and millions of people would do it.

> What's really funny about this though, is that these VCs -aware that this is the case - don't decide "Better be super careful about dealing with SVB and slowly diversify to de-risk this massive systemic risk to their industry. No, instead what they do is they execute the exact bank run they know will massively damage their industry.

They can't even say that without causing a bank run because everyone with a brain in their heads would ask themselves "I wonder why they are saying that, something must be wrong" and that alone causes the bank run. Even a bank saying "everything is fine" can cause a bank run because people would wonder why they feel a need to say that.

Plus, even if they could try to quietly de-risk SVB, everyone knew that if even one person spills the beans, the whole plan is spoiled. And what are the odds that nobody would spill the beans? Plus, what if you are a VC and that happened and then all the companies whose board you serve on find out that you didn't warn them in advance even though you knew they could have spared themselves by getting out early? It would not be good for you.

Bottom line -- the incentives to quietly hide a potential bank failure and coordinate a massive (yet somehow stealthy and not scary to depositors) response just aren't there.

> I can equally see a scenario where someone on Facebook or Twitter says "Get out of Wells Fargo" and millions of people would do it.

They do but fortunately people don’t listen because they have better things to do. We also have sitting members of Congress trying to cause a panic. [1]

[1] https://twitter.com/repthomasmassie/status/16350743784541470...

You don't need to imply that SVB is unstable to say that the VCs should have been diversified away from it or cause a run on the bank. It's simply a pretty basic business practice to identify risks and try to mitigate them, and big businesses do this all the time. A massive part of Intel's sales organization with big customers are constantly trying to play this cat and mouse game where Intel will try and sell you stuff that locks you into Intel, and the customer will constantly be making moves to avoid getting locked in to a single vendor.

You say the incentive for co-ordination isn't there, but quite clearly this demonstrates a massive incentive for VCs to be looking at the common dependencies of their companies and mitigating them. They actually do this really frequently with start ups and cloud providers - it's a very strategic decision whether as a small company you go with Amazon vs Google vs Microsoft for your cloud, why? Because you're handing over bargaining power in what is likely to be a potential acquisition. I agree that VCs haven't been thinking about things like that, but they absolutely should. It was always crazy that founders were getting mortgages from the same guys that were doing their business banking.

> I can equally see a scenario where someone on Facebook or Twitter says "Get out of Wells Fargo" and millions of people would do it.

Who has both 1) an interest in bank balance sheets, and 2) enough clout with Wells Fargo's depositors to cause a SVB-style collapse?

Given how large and diversified Wells Fargo is, I think the only people with the reach to get a message like that out on social media (celebrities) probably don't have the interest or credibility to send such a message and have it listened to.

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