Since the start of the month, there have been multiple deposit runs, including on two traditional banks, SVB and Silvergate. What has happened to our safest places for money?

Well, it started on the frontier, in crypto, and now has jumped to tech. The most innovative industries operating out front have been hit first. They are bellwethers, canaries in our coal mine, and indicators and predictors of what’s ahead.

SVB, Silvergate, and crypto are new. Bank runs are old.

The Great Depression was a systemic run on banks. Fear, panic, and loss of trust are vicious cycles. And a run on deposits anywhere threatens deposits everywhere.

What’s the problem?

Here’s the setup:

• You deposit funds. This is common with a bank, though other businesses hold customer deposits.

• Banks use those deposits for lending and other operations. The Federal Reserve requires banks to historically hold between 0-10% (0% since March 2020) of customer deposits while the rest may be used.

  • When you deposit $100 in a bank, the bank may take the $100 and use it elsewhere.

  • This works because people usually keep or grow deposits with banks, and there are minimal withdrawals under normal operating circumstances.

So the setup is that an institution takes customer deposits, then uses those deposits for other things, and only has a percentage on hand to cover daily withdrawals.

Then, withdrawals spike. A run has begun.

For example, if average daily deposits and withdrawals are even, then people stop depositing and withdraw 100% of their money, and the institution which owes the depositor won’t have enough money to pay them. It only has a fraction. Instead, deposit cash is being used for loans, buying bonds, or other operations.

The reason for the spike (or run) comes in many forms, isn’t accurately predicted, and doesn’t really matter.

• FTX (an exchange, not a bank, and as such is required to maintain deposits 1:1 - thus the ‘fraud’) was accused of not having enough cash to cover customer deposits by a competitor. Then customers rushed to withdraw, and the company unraveled. Operations could have continued as usual without the run. Cash runs often uncover frauds, as was the case for Madoff’s.

• Silvergate, the first traditional bank to experience a run this month, worked with crypto companies. Crypto’s losses caused fear, and customers withdrew deposits. My understanding is Silvergate fulfilled all deposit obligations as it liquidated.

• SVB took a loss on bond holdings they liquidated to raise cash. Notably, this problem has been known since at least November. But when SVB announced its plan to deal with it, investors didn’t like it, depositors got spooked, and everyone rushed to withdraw funds.

Basically, everything is normal, something scares or panics people, and everyone heads for the exit.

They do that so they aren’t left without their money when the music stops

If you question your ability to withdraw your deposits, you choose to withdraw them. The first out the door keeps all their money, and those who don’t get out lose it all. Them’s the breaks(?).

Here is the game-theory dynamic:

• If you withdraw and no bank run happens, it’s inconvenient but not a big deal.

• If you withdraw and a run happens, you save your money.

• If you stay and no bank run happens, there’s no change.

• If you stay and a bank run happens, you lose all your money deposited (except those insured).

Both actions could lead to no change, but withdrawing (if you can get it out) protects your money, and staying possibly loses it.

So everyone tries to withdraw.

It’s no longer a question of belief or partnership; that decision has a rational answer for each participant - withdraw and protect your money.

SVB had an entire market it supported and treated well. But when it’s time to make a decision about a potential bank run, their customers chose the clear answer.

And once the run starts, it happens fast. Banks do have tools to combat runs, such as suspending withdrawals or limiting them to a fraction of customers’ deposits. But once that trust is gone, it’s hard to reverse.

The result is customers want deposits that aren’t there.

Everything is fine, then not fine.

What’s different now, and what’s the same?

Panic and fear are old causes of runs. If you believe your deposits are at risk, you will remove them. You deposit your money because it is safe, not to gamble your savings.

Larger groups acting with greater coordination. The internet and media have enabled groups of people to coordinate actions and act en masse. Think meme stock craze, but applied to a bank run. A Reddit thread or Tweet spreads like wildfire to a system built with the idea that depositors act as individuals instead of groups. SVB’s startup customers are guided by their investors, and when investors said to take the cash out, they did.

We have seen how fast a virus spreads, and panic at a trusted bank consumed it within 48 hours. Memes and ideas inside a network impact the whole network faster than ever.

New industries. The deposit holder itself doesn’t matter. Crypto, startups, it’s easy to blame these on scapegoat industries. Yes, different and new groups act in different and new ways. And the initial momentum of deposit withdrawals was caused by these industries taking out their deposits to fund operations that had previously generated deposits. You know, what you’d expect to do with your cash when needed. Silvergate and SVB both operated in specific industries, where banks diversified across verticles benefit from resiliency when a specific industry is challenged. That said, everyone acts the same when faced with a bank run.

Why does this happen?

Runs happen because fractional reserves back deposits. That is the 0% of the money you deposit in a bank that the bank must keep. Essentially, they are right anytime someone claims an entity with less cash than deposits can’t meet deposits. And once there is a question of deposit safety, folks face the bank-run game-theory choice.

FDIC and government reliance for funds. Basically, the reason we believe our fractional deposits at banks are safe is that the government says and everyone agrees they are. They monitor and regulate banks and tell us they are safe to use. But those banks aren’t safe from runs independently when holding fractional reserves. SVB was deemed in solid financial health until it wasn’t. So the government guarantees up to $250,000 in deposits to assure depositors their money is safe. However, this is more impactful for individuals than businesses, who have the majority of deposits. Very few businesses operate on less than $250,000 in cash.

Perspective, biases, and credentials.

Discovering the best and most accurate solutions is important and valuable. As such, here are potential biases I’m subject to that you should vet to help us get to the right answer instead of my answer:

• I am active in crypto. ENS wallets WickedValley and MomentaryValues.

• I have not lost capital nor identified capital exposed to bank runs or crypto collapses (ex. crypto market exposure) that have happened. I do hold cash on deposit with traditional finance institutions (below FDIC insurance threshold, and yes, I’m having fun staying poor).

• I worked at a bank for about nine years and competed with SVB in their core market.

• I know employees, customers, investors, and more both at SVB and within the ecosystem they’ve dominated.

• I do not have an active connection to any bank (except the above-disclosed personal depository), and no representative has provided me with information. These ideas are my own with research and consumption of other ideas.

• I barely understand how banks work, let alone the federal reserve system, depositor and human psychology, the global macro or micro economic systems, or the historical timeline and context with which deposit runs and financial systems have existed.

• In general, I believe in the individual and their freedom and responsibility for themself. That tends to steer me away from government intervention in private problems. However, I am unqualified, not an expert or knowledgeable individual, about anything such as monetary policy or governance in general.

This piece is truthful and evidence-based to the best of my understanding. However, I have completed it on my own and welcome corrections, additions, observations, and feedback.

That is to say, these ideas are to be valued on their merits, modified, discarded, and improved.

So what happens?

Good question and I don’t know.

That said, there are possibilities:

1. Folks wear the bank run.

   1. Nobody steps in to cover the deposits, and customers with deposits at a bank that can not provide them lose out or try to collect in bankruptcy.

   2. Companies that operated as if they had millions of dollars face only having $250,000 insured by the FDIC (I do not understand how FDIC reimbursements work).

   3. Businesses may move deposits to only the largest banks categorized as systemically important (too big to fail), where the government will step in to protect them. The government has said it will not let them fail. Estimates are the FDIC has the cash to fund about 1.25% of total existing deposits across all banks.

   4. SVB fallout is thousands of startup and technology companies cannot pay employees or continue operations without additional funding, potentially extinguishing a generation of businesses. The businesses that survive may benefit from the experience, grow from the difficulty, and have less competition on the other side, but they experience acute pain.

   5. There are clear guidelines of what accounts and how much the government will support deposits. Companies and people did not appreciate this, but the government may make clear it is standing by its existing guidance.

   6. If deposits aren’t honored, it increases the certainty of choice to flee first at future bank runs.

2. Government or another company steps in and fulfills the obligations to customers.

   1. If there is an asset that should ever be protected, saved, or ‘bailed out’ by the government, it would be deposits used in the fractional reserve banking system the government backs, regulates, and supports. Fractional reserves work because the government says it does. Guidelines are expanded to protect deposit accounts from loss.

   2. Another bank or business could step in and honor the deposits of customers who lost out in a run. Other banks fear acquiring a bank that experienced a run, less they acquire the pandemonium with it, and then experience their own run. But potentially, a systemically important institution could acquire the failed bank, with the government's backstop saying it is too big to fail.

3. Aim to prevent future bank runs.

   1. Withdraw rules set up front. Perhaps banks set new rules around withdrawals, such as maximums or length of deposit, or clarify they will not honor deposits in the event of a bank run until the panic has passed.

   2. Regulations aim to ensure banks are healthy so that depositors don’t panic. Often it is concern about a bank’s financial health which sparks a run. However, even the best financially positioned business may experience a bank run if it holds more deposits than cash on hand and panic strikes.

   3. Customers or regulations could require full reserves.* That is to say, 100% of deposits must always be held. Fractional reserves improve economic growth by creating more money for the system. 1:1 deposits to reserves would constrain capital in the system. Depositors would be more likely to require this than a change in monetary policy. (*I do not fully understand, and this is not a comprehensive outline of the full drawbacks of 100% reserves

If deposits impacted by bank runs are not honored by the government or another company, there is a likely deposit flight away from non-guaranteed banks (exacerbating the problem for them) to significant financial institutions (thus government-backed), off-bank balance sheets to things like money market accounts, or fully-reserved deposit accounts. It’s possible that significant financial institutions become something like a government-backed oligopoly.

The speed of flight.

There is a fire, and we should address it now instead of later. Fires are much easier to extinguish when small.

What we shouldn’t do is ignore the problem. Nothing becomes systemic like a problem unaddressed.

After all, it’s your money . . . right?

When I received that rebuttal, I was on a call to set mission and direction for an early-stage crypto organization. The organization's assets had skyrocketed and outpaced the systems and infrastructure, and we were debating adding new members against ownership dilution for existing members. And the group was concerned the assets would continue to moon, and other folks would take from our pie.

And crypto-asset increases were astronomical across the board. So, of course, everyone wanted more.

Enter FTX and Sam Bankman-Fried. 

FTX, a crypto exchange, was founded in May 2019 and, by January 2022, raised $400 million at a valuation of $32 billion. Its initial valuation was about $100 million, a 31,900% increase in less than two years. And that $32 billion valuation was supported by blue-blood investors.

To add context, the stock market has had the best historical returns at something like 10%. A good stock market decade may be closer to 15%.

Returning to the first comment, a 100x increase is a return of 9,900%. That number was being used as a baseline, not an upside case.

So, of course, folks saw stars across the crypto space.

But there's a hidden cost to the get-rich-quick mentality. And we've seen it the past few weeks with FTX's implosion - today, it's worthless.

When you throw a rock up into the air, it ascends quickly before returning to earth just as fast. To permanently raise its elevation, the rock's floor needs to increase - say, by carrying it up a mountain.

It's slower and takes more effort, but that's how long-term value is created. 

The crypto market and its players disconnected from reality, but what's true tends to find the light. If you look at a rock on the way up, it seems it will go up forever - to the heavens and beyond. But reality imposes the laws of physics, and while you're celebrating, it may hit your head on its return to earth.

The crypto space can create massive long-term value. But, like any gold rush, euphoria and excitement are bound by what is.

It's sad we learn these lessons by harming ourselves. People lost massive wealth and well-being, and the space was damaged by what happened.

Yet we grow stronger when malignant growths are removed so healthy growth can bloom. Of course, that's not much solace to those harmed, but there is a fresh opportunity for us all.

Even if it's not at 100x returns.

The victims of these acts and their stories are everywhere. It’s tragic. And it’s impacting all of us.

A few weeks ago, I was at a big event, and people were everywhere enjoying the day. I caught my mind going to mass shootings and how people target gatherings like this. As I accepted that and chose to enjoy the event anyway, I passed a kid in the crowd, and we made eye contact. That thought was new for me, a fear of an attack on the event, but was that child living with it constantly?

What is going on?

Safety is a primary concern everywhere. Many states require seatbelts, we’ve eliminated dangerous animals, and folks lock up their houses. We’re the safest we’ve ever been – imagine the medieval countryside roamed by bandits, a hunter-gatherer society sharing woods with tigers, or native lands in continual tribal warfare. But a new hazard has risen within us.

I disagree with labeling something as a buzzword and leaving it at that. If we categorize something as terrorism or a mass shooting and leave it at that, we stop before understanding what happened. That person did it because they’re a terrorist and belong to the group we’ve labeled terrorists. Then we know that hate and terrorism exist and shake our heads.

So let’s dig deeper. Not a mass shooting, but the best-known terror attack happened on 9/11. Yes, Osama Bin Laden wanted to hurt the U.S. But the primary folks who executed the attacks, the Hamburg Cell, became radicalized against the West because they were discriminated against, alienated, and isolated. They’d intended to fight in Chechnya and were turned against the West by their experience.

While this is different from local mass shooters, those underlying causes of what creates a killer provide evidence of why people pursue that end.

So let’s shift to mass shooters. Jillian Peterson and James Densley compiled what sets the stage for a mass shooter: childhood trauma creates a foundation, and the person becomes hopeless, isolated, self-loathing, and rejected by peers. Then, the person begins to act erratically. This crisis point is associated with suicide; sometimes, shooters have previous suicide attempts.

Then something insidious happens; self-hate turns against a group. The individual blames others for what has happened to them. That group may be religious, demographic, or institutional. For example, a person gets bullied in school, then blames that bullying for who they’ve become, and that school becomes a target.

Most mass shooters view the act as suicide but turn it into a murder-suicide to express how a group caused this to happen.

So, could we prevent mass killings the way we prevent suicide? Here are the risk factors for suicide:

1. Previous suicide attempt(s)

2. A history of suicide in the family

3. Substance misuse

4. Mood disorders (depression, bipolar disorder)

5. Access to lethal means (e.g., keeping firearms in the home)

6. Losses and other events (for example, the breakup of a relationship or a death, academic failures, legal difficulties, financial difficulties, bullying)

7. History of trauma or abuse

8. Chronic physical illness, including chronic pain

9. Exposure to the suicidal behavior of others

And here are the best prevention measures:

• Contacts with providers (e.g., follow-up phone call from health care professional)

• Effective mental health care; easy access to a variety of clinical interventions

• Strong connections to individuals, family, community and social institutions

• Problem-solving and conflict resolution skills

As with terror, isolation and trauma set the stage for violent acts. In almost every case, young shooters call someone, such as a behavioral health clinic, for help before acting. But too often, they don’t receive the support they need.

People, such as mass shooters, violently act because they’re isolated and don’t have a support system to help them.

I’m grateful to my support system for picking me up when I struggle. I published my eulogy, what I’d say if I died. I valued thinking through what I’d want when my life ends. And it’s about death and is a weighted piece. After I published it, one of my friends reached out to check on me. I’m emotional thinking about the love and care in that simple call.

Beyond that, I’ve gone to a counselor for years. It’s a great space to help me recognize what’s happening and how to deal with it.

That support system enables me to be the best version of myself and avoid problems spiraling because I have to deal with them alone.

Too many people don’t have that, and we must provide that support to them. These people are victims before they become killers, and we can address that before they create more victims.