SVB is a holding company containing a broker-dealer and a bank. Only the banking component appears to have failed. This is the second largest bank failure in U.S. history, and in a weakening economy, panic has set in.­­ SVB’s downturn coincided with widespread decline in banking stocks and for good reason. Around half of all VC-backed startups do business with SVB. It is a critical player in biotech, cybersecurity, and social media, but really the name says it all: it was the most important publicly traded bank specializing in Silicon Valley. SVB was so ubiquitous that startups were encouraged or felt pressure to work with the bank to ....

A classic bank has short-term deposits and long-term assets. Depositors loan their money to the bank for an interest rate payment. That bank loans that money to fund useful projects that earn a higher interest rate payment. As long as the depositors do not withdraw their funds, the bank earns a profit. The deposits are liabilities to the bank and the loans are assets to the bank. Almost every single bank in the world uses “fractional reserve banking” in which only a fraction of cash deposits are retained in the bank at a given point in time. If enough depositors withdraw their funding at once, then the bank collapses. If key depositors withdraw their funds from the bank, that can scare other depositors into withdrawing their money from the bank, ultimately resulting in a state regulator to call in the bank and call in the FDIC.

The possibility of a crisis in which a long-term depositor withdraws his or her funds, causing other depositors to withdraw their funds for rational reasons, motivates deposit bank tax and sometimes taxpayer-backed insurance in neoclassical fi.... In fact, the U.S. government follows the recommendations of neoclassical finance via the FDIC, perhaps the most efficient government agency. In a bank run, the FDIC closes the bank, insures all deposits under $250,000 via the taxpayers, and attempts to find a buyer. If a buyer is found, that buyer takes on all the insured deposits. Often, but not always, the buyer will take on a fraction of the uninsured deposits as well. The FDIC attempts to minimize liquidation costs and allows firms to The entire process usually takes less than 72 hours. A bank is closed on a Friday and reopened on a Monday. In some cases, it is reopened on a Saturday. Most bank employees are fired in the best case and in almost all cases the management is replaced.

All this is likely to have happened to SVB within days after article is posted. Why is SVB important? Unlike Lehman brothers, SVB is not an investment bank and not a key financial intermediary. SVB has concentrated exposure to the U.S. tech sector, but its role in the global financial system appears to be limited to perhaps India. Remember how I said that the FDIC insured up to $250,000? Well, anything beyond that is given priority in payout (so that uninsured depositors are paid before bondholders and equity holders), but no guarantee. SVB likely banked with high net worth individuals and companies so that the average uninsured asset holdings by venture capitalists far exceed what the FDIC will guarantee. The FDIC seizing a bank so rapidly in midday is unusual because it normally takes a month or so to market a bank of this size. As usual, uninsured depositors will likely get receivership certificates which pay dividends over time with a delay and probably a haircut (i.e. not paid in full and certainly not in present value terms). If no buyer is found, then you can count on an equity market fall on Monday. All the assets will be auctioned off, which is a process that will take a while.

So, why not worry? One reason not to worry is that how a bank fails matters. The simplest analysis divides banking bankruptcies into two types: insolvency and illiquidity-driven bankruptcies. An insolvency bankruptcy occurs when a bank’s assets are simply less than the present value of their costs. The bank’s assets must be sold, and – in a laissez-faire world – someone holding the bank’s liabilities must take a loss. Legal codes in the U.S. (and for most of the planet) specify a priority of who takes losses first: shareholders, equity holders, and depositors is the usual order. In the classic, illiquidity-driven bankruptcy, a bank’s assets present values are greater than the present values of its liabilities. Instead, the bank simply cannot pay out its short-term liabilities because its assets are tied up in longer-term assets. “Maturity mismatch” is when the maturity of the liabilities, i.e. when payments are due, is shorter than the maturity of the assets. Without another source of low-cost financing to close the gap between liabilities due today and your income tomorrow, you are broke.

This is most likely how SVB went broke. What happened? The best explanation appears to be given by Jamie Quint and the Financial Times. An inflow of cash fueled by the Treasury and low Fed rates caused a flood of deposits into SVB, which tripled in nominal terms. SVB could not figure out how to create high yield assets with the inflows. Thus, SVB wound up purchasing low-yield, long-duration, relatively safe m... that were intended to be held to maturity (HTM).

On the liabilities side, SVB was holding huge fractions of its deposits from small to midsize VCs and startups. These depositors are cash intensive and need regular capital injections to make payroll and capital expenditure payments: compared to retail banking, SVB’s depositors probably had far higher turnover and interest rate sensitivity. For the banker, these types of accounts are relatively expensive to maintain. If interest rates remained low at a few percent, then they would have made a small profit on their holdings. As it happened, the Fed raised rates. This had two effects: first, SVB’s bank account yields needed to rise, which they did and the market value of SVB’s recently purchased MBS’s fell. The bonds comprised 56% of SVB’s portfolio creating the classic maturity mismatch scenario. This scenario, in turn, caused SVB to attempt to raise low-cost funding, which in turn raised the alarm at Thiel enterprises. Already, this is a stark contrast with Lehman brothers, in which subprime, riskier mortgage backed securities ensured that the firm was closer to the insolvent side of the spectrum (although even there, all secured creditors received complete remuneration).

Although SVB is classified as a systematically important financial institution, if SVB’s 10-K’s are reported accurately, then there is little systemic risk even in the fire sale scenario. The FDIC is almost certainly scrambling now to find one or two firms interested in buying out SVB. A firm like J.P. Morgan could build considerable goodwill with the Fed and Treasury by doing so, because such a move has the potential save regulators and finance ministry civil servants much headache. Elon Musk has also reportedly expressed interest. In any case, it is common for uninsured depositors to be paid off as they are just behind insured depositors as the highest priority in a bankruptcy. SVB is a minor player in investment banking and has a weak role as a financial intermediary in most of the economy outside Silicon Valley. Silicon Valley will take a large hit. Some startups will be dissolved. Innovation will slow down in the short-term. However, as long as the technologies deployed by the startups have positive returns, they are likely to be rediscovered and redeployed in fairly short order.

Jeremiah Jackson (pseudonym) is a former official of the US Department of Treasury