“So you run down to the safety of the town/ But there’s panic on the streets of Carlisle” — The Smiths

Well, I guess I know what I’m going to be writing about for at least the next few days! In my post on Friday, I tried to explain the basics of why Silicon Valley Bank had a run. Today I’m going to talk about how to prevent a wider panic in the banking sector.

In that earlier post, I noted that the biggest danger from SVB’s collapse has nothing to do with startups failing to pay their employees. If a bunch of startups fail to pay their employees for a while and a few go out of business as a result, it’ll be bad for tech workers and founders and VCs, and it’ll probably be bad for the local economies of tech clusters like San Francisco, but ultimately it’ll just be one more piece of the tech bust that has been going on since early 2022. The far, far bigger danger is a banking panic — a bunch of people might see what happened in SVB and pull their money out of other banks, sparking a wave of bank failures and ultimately a recession.

As I noted, if this happens, it won’t be for the reasons it happened in 2008. The banking system as a whole does not depend on Silicon Valley Bank. Other banks are not dependent on loans from SVB, or on lending to SVB, and if SVB’s assets are dumped in a fire sale, it will not make other banks suddenly insolvent. Thus, we are not at risk of a true financial contagion. That’s good!

What we are at risk of is a panic. A bunch of people who never saw a major bank run in their careers, or who forgot about 2008, or who just assumed it could never happen to them, might wake up and go “Oh my God, banks aren’t safe! The sky is falling! Help help help!!!”, and rush to pull their money out of their bank and put it in Chase or Treasuries or cash stuffed in socks. And then other banks might start failing too. This sort of panic isn’t rational, but as I explained in my last post, it’s a self-fulfilling prophecy — you don’t need rationality to have a bank run. Indeed, people in the VC/startup world are saying a lot of very panicky things right now:

This seems like a bad comms strategy to me, since A) it could cause more bank runs, and B) if the government decides that the VC/startup world is systemically financially important, there will be a lot of new regulation in the pipes, like there was for housing after 2008. But panic isn’t a comms strategy; it’s an emotion.

Anyway, it’s unlikely that a panic would focus on big banks, which have an implicit government guarantee after 2008. And it’s unlikely it’ll focus on small banks, most of whose deposits are FDIC insured. But mid-size regional banks, especially in California, could definitely be vulnerable. The stocks of First Republic Bank, Signature Bank, Western Alliance Bank, and PacWest took a big dive this week, even as big bank stocks took only a small dip:

There are a lot of wild rumors and claims floating around about these banks right now. I don’t trust any of them. But nevertheless, it is possible that this coming week, or the next, we’ll see some runs in these banks.

It’s also possible that the rest of the U.S. economy and financial system will simply ignore the tech sector again. Maybe the corporate depositors of banks around the country will simply shrug and decide that the failure of SVB and a couple of other California banks that cater to tech nerds has nothing to do with them, and go about their business. So far, that has been the pattern — tech stocks crashed in 2022, VC funding dried up, and big tech companies had a ton of layoffs, but overall consumption and employment and growth in the nationwide economy are doing great. So maybe that will happen again.

But there is a reason why people outside the tech world might be worried: interest rates. SVB may have been famous for making risky loans to startups, but its balance sheet was heavy on long-dated government and corporate bonds. One reason it was at increased risk of a run was that those bonds had declined in value due to rising interest rates. (Remember, when rates go up, bond prices go down!)

Other banks, outside of the tech world and California, also have a lot of long-dated government and corporate bonds on their books. (If you see people talk about “hold-to-maturity” or “HTM” assets, that just means long-dated bonds.) That’s why recent rate hikes have reduced the value