What Happens To Education Institutions When A Bank Fails?

banking failure
(Image credit: StockSnap)

It’s easy to separate the banking industry from the education market in our heads–privately held companies vs publicly funded entities. One failure should not impact the other, right? 

Well, in the case of Silicon Valley Bank, there are actually several implications for education entities.

What Is SVB? 

Silicon Valley Bank (SVB) is not really your typical bank. According to economics journalist and blogger Noah Smith, “SVB, as it’s known, was a bank that lent a lot of money to startups (or “startups,” i.e. bigger tech companies that are still private), and provided a lot of financial services to both startups and other tech companies.” 

In what is being called the first “twitter-fueled bank run,” $42 billion was withdrawn in a single day, leaving the bank with a negative $1 billion deficit. SVB was FDIC-certified, but that was not enough for the large accounts held there.

Massive venture capitalist funds were held at SVB, which meant that many accounts held at SVB were above the $250,000 threshold insured by the FDIC. This is important to note because if a bank is FDIC-certified, as SVB was, this means that the government would cover any cash the bank didn’t have up to $250,000 on every account. 

The problem in this scenario is that it is estimated that approximately 93% of accounts held at SVB had more funds in the account than $250,000. The bank and the government could not pay.

So, Why Was There A Run On SVB? 

This is where the story gets really tech 2023. According to CNN, “The staggering withdrawals unfolded at a speed enabled by digital banking and were likely fueled in part by viral panic spreading on social media platforms and, reportedly, in private chat groups.”

It was reported that Peter Thiel, a prominent startup investor, advised companies to pull their money from SVB amid concerns for financial instability. The rumors for bank runs have always moved swiftly, but in the era of social media and instant connection, the pace was greatly accelerated. 

Noah Smith again summarizes three basic possibilities here:

  • a self-fulfilling prophecy 
  • worries about the value of SVB’s assets 
  • withdrawals due to a worsening venture capitalist investment situation 

Startups taking advice from master venture capitalists can start an avalanche of withdrawals, which is exactly what happened last week. It was truly a sight to behold, and we haven’t even talked about how the federal government stepped in. 

What Does This Mean For Education? 

Let’s look at what might have happened to some education entities had the federal government not worked to stabilize the situation.

John Bailey for Burbio does an excellent job of summarizing the specific ways this bank run would have impacted education entities: 

  • A large number of education companies were impacted and potentially unable to make payroll this week if the Feds hadn't intervened. That could have disrupted curriculum, tutoring, and other services to schools. 
  • SVB's clients also included nonprofits and charter schools. The inability to access funds could have impacted more than 15% of Massachusetts public charter schools, disrupting the education for more than 9,247 public school students. Some California charters also banked with SVB. 
  • Telehealth companies were worried they wouldn't be able to make payroll for doctors and therapists. 
  • At least 26 public pension funds (managing money for ~80 pension plans) directly hold stock in SVB Financial Group. 

These are some big things for districts to consider when selecting a bank, and we’re not out of the woods yet. John Bailey also alerts us to the fact that the immediate crisis has been averted for now but the FDIC still needs is also buyers for SVB, which it hopes to split in two. Meanwhile, First Citizens BancShares is also considering an offer for SVB, according to Bloomberg. 

It's also still unclear how much more flight there will be from regional banks to the “too big to fail” institutions. 

In the era of wildfire rumors, it is easy to get jumpy when someone of prominence questions the stability of a bank. Keep in mind the three reasons that this one happened, and make sure you are withdrawing funds for the right reasons, and maybe avoid Twitter for your banking decisions.

Susan Gentz

Susan comes from a strong policy background as a former staffer in the United States Senate and Legislative Aide in the Iowa House of Representatives. 

Along with experience at both federal and state levels, she served as the Deputy Executive Director for the Center for Digital Education, worked for a government relations firm in Arlington, VA and heavily worked on federal and state education policy at iNACOL, where she wrote published reports to move the field forward with innovative learning models, best practices, and policy recommendations.