Silicon Vally Bank, the 16th largest in the US, was shut down and put under the control of California Department of Financial Protection and Innovation on Friday. This failure is set to send ripples across smaller technology companies. Even though there is good reason to think that uninsured depositors will eventually be made whole or nearly whole, some may have had so much of their working funds tied up at Silicon Valley Bank that it may be hard for them to find work-arounds, particularly with so many other companies in the same pickle. While is it is likely someone will cobble together financing, at what speed and on what price?
One seldom-acknowledged issue with the American banking regime is that it is pretty much impossible for small to medium sized business to protect themselves from the risk of a bank failure. For operational reasons, they pretty much have to keep the money they will use for payroll at a single bank. Similarly, many companies have routine transactions that exceed the $250,000 deposit guarantee.
Business Insider noted:
SVB had a relatively small, highly committed group of depositors. About 37,000 customers accounted for nearly $157 billion or 74% of the bank’s assets with an average account size of over $4 million….at the end of 2022, 87% of the bank’s $173 billion in deposits were uninsured.
Reader Zephyrum explained that was no accident:
When I had a VC-backed company more than a decade ago, we were required to put our $11M lump-sum funding into SVB where the VCs could keep an eye on it. They had levers into the bank. It bothered me at the time.
Business Insider explained that Silicon Valley Bank acted as a merchant bank, and as a result, many tech executives also had large deposits at the bank:
And many in Silicon Valley say SVB has no equal – doing everything from providing venture debt to personal mortgages to founders who have little banking history and would likely not be approved by other institutions.
And based on the response of at least some customers, the collapse will have knock-on effects. From Daily Mail:
A Silicon Valley Bank branch in Manhattan today called the cops on tech investors trying to pull their cash out as a run on the bank forced regulators to seize its assets.
Police were called after ‘about a dozen’ financiers, including former Lyft executive Dor Levi, showed up outside the building on Park Avenue as investors scrambled to get their money out amid the biggest collapse since the Great Recession.
And from the New York Post:
The CEO of a Boston-based health and wellness company said she has been unable to log into her Silicon Valley Bank account, where she has at least $10 million in deposits.
Ashley Tyrner, the founder of FarmboxRx, told The Post on Friday that she has been frantically trying to reach her banker at SVB, the California-based lender that is teetering on the brink of collapse.
She told The Post that she’s been experiencing “the worst 18 hours of my life.”…
Tyrner, who heads a company of 63 employees, told The Post that her firm’s banking relationship with SVB stretches back two years.
“We were going to raise a round a venture financing,” she said, noting that SVB “is one of the go-to banks” for that purpose.
Tyrner claimed that despite having had only $56 million in revenues last year, the freezing of her >$10 million corporate account (the article discusses her CEO trying to process a wire transfer) will not impair the viability of her business, since she diversified her banking relationships.
A second Daily Mail story argued that the Silicon Valley Bank deposit freeze will have serious effects:
The collapse of Silicon Valley Bank today sparked fears of a contagion in the tech industry with mass layoffs predicted by experts if start-up firms fail to make payroll….
NY-based entrepreneur Brad Hargreaves warned that the failure of SVB would have a ‘massive impact on the tech ecosystem.’
‘SVB was not just a dominant player in tech but were highly integrated in some nontraditional ways. A few things we’ll see in the coming days or weeks,’ he tweeted.
‘One, SVB was incredibly integrated into the lives of many founders. Not just their startup’s bank & lender, but also provided personal mortgages and other financial services. A whole mess for FDIC (or the eventual buyer) to unwind.
‘Two, any ‘uninsured’ balances at SVB – those above $250K – are in jeopardy. FDIC plans to pay them out ‘as it sells the assets of SVB’. Lots of startups exclusively banked with SVB as *this was a covenant of their debt*!’…
‘This is going to be tough on a lot of founders and startups, a lesson to be learned,’ said Adrian Mendoza, founder and general partner of Mendoza Ventures in Boston.
He told The Boston Globe: ‘I am getting texts and e-mails from all over. We are getting bombarded.’
One of our running buddies from the financial crisis days, bank stock analyst Chris Whalen, confirmed our early take yesterday, that we could soon see a rerun of the Volcker rate hikes, where the Fed had to reverse gear sooner than Volcker wanted due to damage to the banking system:
Christopher Whaler, Chairman of Whalen Global Advisors in New York, said: ‘I think the Fed badly miscalculated the impact of rising interest rates and so these are self-inflicted wounds and if we see more banks fail then the Fed is faced with a very tough situation which may force them to drop interest rates.’
‘There could be a bloodbath next week as banks are in trouble, the short sellers are out there and they are going to attack every single bank, especially the smaller ones.’
‘I think Silvergate started it. That one was the first pebble to go off the mountain and now we have a boulder and more are likely to follow.’
Politicians tied to Silicon Valley are calling for a bailout. But if the bank was solvent, as many claim, and just hit by a panic, a bigger bank should absorb it once it has kicked the tires. From the Economist:
The question now is whether there will be a bail-out and, if so, how big it would need to be to make depositors whole. svb “is the lifeblood of the tech ecosystem,” notes Ro Khanna, a congressman from California’s 17th district, which includes some of the valley. “They can’t let the bank fail. Whether that means that it should be acquired by another company…or get assistance from or even a statement from the Treasury department so that the depositors feel secure—I will leave that to the experts.”
And even if the bank is wound up with no losses to depositors, the failure will still make like harder for new tech companies. Again from Business Insider:
“It’s going to be harder to bank as a startup going forward,” [Mark] Suster [manager partner at Upfront Ventures] said. “Our industry has shot itself in the foot.”
Other information about the windup courtesy Wolf Richter:
The DFPI [California Department of Financial Protection and Innovation] appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The FDIC announced that it had created the “Deposit Insurance National Bank of Santa Clara (DINB)” and that the FDIC, as receiver, “immediately transferred to the DINB all insured deposits of Silicon Valley Bank” to protect insured depositors. Depositors will have access to their insured deposits on Monday, March 13.
The FDIC, as receiver, said:
- “The main office and all branches of Silicon Valley Bank will reopen on Monday, March 13, 2023.
- “The DINB will maintain Silicon Valley Bank’s normal business hours.
- “Banking activities will resume no later than Monday, March 13, including on-line banking and other services.
- “Silicon Valley Bank’s official checks will continue to clear.
- “The FDIC as receiver will retain all the assets from Silicon Valley Bank for later disposition.
- ‘Loan customers should continue to make their payments as usual.”
Insured depositors: “All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023,” the FDIC said. They will not lose a dime.
Uninsured depositors: “The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors,” the FDIC said and provided a phone number for this folks to call. It looks like they will get at least a portion of their funds.
FDIC is unlikely to lose money, that’s what it looks like from this statement as the available assets, after they’re sold by the FDIC, will be sufficient to pay for all insured deposits, other liabilities, and at least a portion of the uninsured deposits. So it looks like the FDIC will not incur a loss.
Shareholders got bailed in and face a total loss. They’re the ones who are “bailed in” automatically when the FDIC takes over. Other investors may have a partial loss.
Chaos at the end. The fact that the FDIC took over the bank during the day — rather than Friday evening, which is the normal procedure — shows just how fast-moving and chaotic this situation, including a massive run on the bank, had become.
The fact that the California regulator calls itself the California Department of Financial Protection and Innovation is an omen of sorts, since “financial protection” and innovation do not go together. As we wrote in ECONNED:
But opacity, leverage, and moral hazard are not accidental byproducts of otherwise salutary innovations; they are the direct intent of the innovations. No one was at the major capital markets firms was celebrated for creating markets to connect borrowers and savers transparently and with low risk. After all, efficient markets produce minimal profits. They were instead rewarded for making sure no one, the regulators, the press, the community at large, could see and understand what they were doing.
Admittedly, at this point, it does not look like Silicon Valley Bank walked all that much on the wild side, but was overly concentrated, both in its industry focus and its skew toward comparatively few and large depositors. But the tech industry looks set to at least have a very bad case of intestinal distress over this failure. And it’s likely, as usual, that the smaller fry, the employees, company owners, and suppliers, will take much more of a beating than the venture capitalists.