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Silicon Valley Bank failure could trigger run on U.S. regional banks

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Federal Reserve and Federal Deposit Insurance Corporation (FDIC) decisions concerning the future of Silicon Valley Bank may affect regional banks across the United States, putting trillions of dollars at risk of a bank run, said former Bridgewater executive and CEO of investment firm Unlimited Bob Elliot. 

In a Twitter thread on March 11, Elliot stated that nearly a third of deposits in the United States are held in small banks, and around 50% are uninsured. “The FDIC insures small deposits in all the banks in the US, but that only covers about 9tln of the nearly 17tln of outstanding deposit base. […] Under the hood the coverage rate is roughly 50% across most institutions while credit unions are higher (not above).”

Small banks in the United States had $6.8 trillion in assets and $680 billion in equity as of February 2023, according to Fed data. Considering this scenario, a failure on the tech bank would put in “risk of a run on thousands of small banks”, further making the SBV situation a “main street problem,” said Elliot.

Total Assets, Small Domestically Chartered Commercial Banks in the United States. Source: U.S. Federal Reserve

Elliot’s comments were among many others seen on social media channels over the weekend as fear surrounded the future of the California bank. A petition created by YCombinator CEO Garry Tan claims that nearly 40,000 of all depositors at Silicon Valley Bank are small businesses. “If swift action isn’t taken, over 100,000 people could soon lose their jobs,” says the document urging regulators “to step in and implement a backstop for depositors.”

FIDC and the Fed are reportedly discussing creating a fund to backstop more deposits at troubled banks, according to a Bloomberg report citing people familiar with the matter. The fund is a response to the SVB collapse and is intended to reassure depositors and reduce panic.

Silicon Valley Bank is one of the top 20 largest banks in the United States, providing banking services to many crypto-friendly venture firms. Assets from blockchain VCs totaled more than $6 billion at the bank, including $2.85 billion from Andreessen Horowitz (a16z), $1.72 billion from Paradigm, and $560 million from Pantera Capital.