A lot of ink has been spilled over the demise of Silicon Valley Bank. I’ve never banked with them, and the current crisis doesn’t affect me directly today, but at least three of my prior employers were customers. While it was a regional bank, its collapse is the second-largest bank failure in US history.

Because SVB was an FDIC-insured bank, depositors’ first $250K are safe. But startups tend to have far more than that on hand. VC firms, depending on the firm, are likely to too (although a lot of their funds are wrapped up in commitments for future capital calls). For some, payroll alone may rapidly exceed $250K, threatening their ability to do business. Many companies may move their money from other regional players into national banks, creating more instability.

The FDIC levies premiums on its members and uses the proceeds to cover the depositors at failed banks, in a similar vein to most insurance companies. There’s no taxpayer involvement and no funding from the federal budget. But, of course, some people - VC investors, for example, whose fund returns are about to see major dings - would like the government to make depositors 100% whole. That could mean diving deeper into the FDIC insurance fund, jeopardizing depositors at other banks that might collapse; it could mean finding an emergency buyer, which normally-libertarian VCs like David Sacks have called for; or it could mean a bailout, which would necessitate taxpayer participation.

Benchmark Capital General Partner Eric Vishria:

“If SVB depositors aren’t made whole, then corporate boards will have to insist their companies use two or more of the BIG four banks exclusively. Which will crush smaller banks. AND make the too big to fail problem way worse.”

The thing is, this problem was exacerbated by Trump-era deregulation that was pushed by VCs and, notably, Silicon Valley Bank itself.

Representative Katie Porter:

“The collapse of Silicon Valley Bank was totally avoidable. In 2018, Wall Street pushed a deregulation bill that allowed banks like SVB to take reckless risks. It passed, even as I and many others warned of the risks. I am writing legislation to reverse that law, S. 2155.”

That’s probably one part of the solution: re-establish regulations that protect depositors at smaller banks. Silicon Valley as a whole needs to learn to lose its anti-regulation bias; while it’s certainly true that government is bad at understanding technology, that doesn’t mean it’s bad at understanding societal risk. Banks in Silicon Valley shouldn’t get to skirt safety protections because the industry has a culture of taking risks in the name of innovation. As we’re seeing, that risk can have real adverse effects outside of the industry.

Hedge fund manager Bill Ackman:

“SVB's senior management made a basic mistake. They invested short-term deposits in longer-term, fixed-rate assets. Thereafter short-term rates went up and a bank run ensued. Senior management screwed up and they should lose their jobs.”

High risk can lead to high reward, but it shouldn’t necessarily lead to that, particularly when you’ve lobbied hard for a reduction in the rules that were in place to protect ordinary people. On those grounds, I don’t think a bailout of SVB makes sense.

On the other hand, the people who really need and deserve financial support are the vulnerable groups who are put in jeopardy by payroll failures: not the entrepreneurs or senior engineers making high six figure salaries, but the people who make the lunches, clean the offices, and work in administrative positions. They’ve been put in a terrible position by risky strategies carried out in the name of greed. Over time, Silicon Valley will be just fine, but the impact to a low income family of not getting paid for a cycle or three can be profound. Job losses may also affect immigrant workers, who may not be able to secure other employment, putting their visas in jeopardy.

There’s potentially more to come. CNN:

US banks were sitting on $620 billion in unrealized losses (assets that have decreased in price but haven’t been sold yet) at the end of 2022, according to the FDIC.

In all this, it’s worth remembering: innovation is not constrained to Silicon Valley, technology business models are not constrained to venture capital, and innovation doesn’t depend on a lack of constraints. I think SVB’s collapse is one more factor in an ongoing changing of the laws of physics in Silicon Valley; one that will not necessarily be for the worse.