Dan Davies On What Brought Down Silicon Valley Bank

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:17)

Joe, a lot has happened in the past few days. I don't even know where to start, really.

Joe Weisenthal (0:23)

Yeah, I mean, I don't either. But I would say, look, the developments, I think, related to Silicon Valley Bank, the speed of the run and the speed of the response are extraordinary.

And it feels to me like this episode could change how banks work in this country. I mean, it's incredible. It's like all deposits seem like they're de facto guaranteed, changing the collateral schedules so that banks don't have to take a mark to market hit on some of their assets. This is extraordinary stuff here.

Tracy Alloway (0:56)

Absolutely. And I am going to start this particular Odd Lots with a caveat, which is that obviously things are very fast moving and we're trying to get some emergency episodes out as quickly as possible. So this is our first entry into what I'm sure will be very, you know, a lot more on this topic. But we are going to be speaking with Dan Davies. He is a managing director at Frontline Analysts. He's also a former regulatory economist at the Bank of England. He was a banking analyst for a very long time and the author of Lying for Money, which is a book all about financial fraud, a very good book, I might add.

Dan, thank you so much for coming on Odd Lots.

Dan Davies (1:37)

Oh, thanks very much for having me. It's always bad news when people want to talk to a guy like me. It's good to be here.

Tracy Alloway (1:43)

I was going to say at short notice as well, but we appreciate you coming on. So why don't we just start with a very big picture question, but how would you characterize the events of the past week or so?

Dan Davies (1:55)

I think what's happened is that we're seeing why certain kinds of deposits are considered to be hot money.

At the end of the day, you've got corporate deposits, which people like to think are sticky, and wealth management deposits in Signature New York, which is the other bank that's been shut down and taken over by the FDIC this weekend, which people like to think are sticky, but they're big amounts of money. It's not like a few thousand in the bank that people have for their transactions. It's a sum of money that people get worried about if they think they're going to lose it. And that means it can be sticky for a while, but when it moves, it really moves. And that's why most regulators don't let you fund long dated assets out of that kind of deposits. Or put limits on your ability to do it.

Joe Weisenthal (2:51)

So what was this case with Silicon Valley Bank specifically, in which not only did it accumulate an extraordinary amount of corporate deposits, but also highly all more or less in sort of one industry?

Dan Davies (3:09)

Yeah, well, Silicon Valley Bank, according to everyone I've spoken to about it, were just very good at customer service with tech companies in Silicon Valley. There was no particular magic to the business model. It's just they built themselves around that. They did a lot of business on the golf course, I'm told.

And when you had a venture capital funded startup, which might easily have $10 million in the bank, they would be the guys who would onboard you easily, give you a bunch of corporate credit cards for your kind of teenage coders who never had a credit card before, and just generally look after you in a way that other banks weren't as sharp on the consumer customer service.

Joe Weisenthal (3:54)

My wife used to be involved in tech startups in New York City, and she said, like, at every accelerator event where startups would get money or raise from VCs, there were always just reps from Silicon Valley Bank there ready to show people how to open up an account instantly. And that was just part of the process of raising VC money was basically part and parcel with getting your Silicon Valley Bank account.

Dan Davies (4:19)

And being good at gathering those deposits means that you gather a huge amount of those deposits.

And then through the last couple of years, when you had a massive boom in terms of VCs putting money into their portfolio companies, they just got these huge inflows of deposits. So I mean, one of the most difficult things to manage in banking is rapid growth.