The failure of Silicon Valley Bank has highlighted underappreciated fragilities of the U.S. banking system. While banking crises have historically centered on credit risk, this recent crisis of confidence stemmed from unrealized losses on safe securities that made depositors anxiously seek liquidity. The liquidation of those securities crystallized mark-to-market losses and amplified the anxieties of these depositors, and a bank run ensued.
How “Payment Banks” Could Prevent the Next Bank Collapse
Silicon Valley Bank illustrates why payroll shouldn’t be stored in an institution vulnerable to bank runs.
March 17, 2023
Illustration by Mark Harris
Summary.
At the heart of Silicon Valley Bank’s failure are uninsured depositors — specifically startup companies who held far more than the insured limit of $250,000 and who couldn’t make payroll without access to their accounts. It’s tempting in light of SVB’s failure to assume that the insured deposit limit needs to be raised, but that solution creates new problems. A better approach would be for the U.S. to follow the example of other countries and create “payment banks” that take little-to-no risk, are highly regulated, and have access to the payment network. They would be a place where companies could park funds — like VC investment earmarked for payroll — without exposing themselves to the risks that normal banks create.