The news out of California that authorities shut down Silicon Valley Bank (SVB) on Friday shocked the tech start-up and venture capitalist world, with its sudden collapse over the course of two days roiling the market by Saturday.
SVB – the 16th largest bank in the US but a crucial one for the startup community – was closed down by regulators on Friday after a bank run dealt it a lethal blow following attempts to recover deposit losses and the sale of treasury bonds and securities.
“SVB was obviously the beacon of the start-up venture community for four decades. Almost, you know, one of those institutions that everyone viewed as too big and too strong to fail,” Samir Kaji, a former banker who spent more than 20 years in the industry, told Euronews Next.
Yet SVB was hit hard by funding drying up over the past year in the tech and startup sector as well as the Federal Reserve’s plan to aggressively increase interest rates to combat inflation.
The bank was backed by billions of dollars worth of bonds, but in having to sell them at a time when interest rates were high, they sold them at a significant loss.
But SVB’s customers were largely startups and other tech-centric companies that started becoming needier for cash over the past year.
“When they had the announcement of the capital reshuffling [on Wednesday],” he recalled, “what ended up happening there was a ‘town hall’ call with their clients which are mainly these VC firms”.
And it actually incited more panic than it did to reassure, Kaji explained.
“There were torrents of emails, voicemails, calls, Slacks, text messages, where all of the VCs were imploring their companies to move capital out of SVB, which created that $42 billion leaving the bank”.
SVB’s ‘specific’ problems to result in only pockets of instability?
SVB is expected to re-open Monday with the FDIC in charge. It said all insured depositors would have full access to insured deposits no later than Monday morning.
“While there are no guarantees, it is very likely that the FDIC – which is the institution created in the New Deal to deal with bank runs and prevent bankruptcy – will likely resolve the situation,” Armand Domalewski, a data analyst with a background in economic policy told Euronews Next.
Samir Kaji
Former banker
“People in the US think that their deposits are only insured up to $250,000 [€234,000], which is legally true. But in general what the FDIC tries to do since 2008 is arrange sales to other banks so that the customers are transitioned overnight. They don’t lose their deposits”.
The people who invested directly in SVB are going to get wiped out, but depositors have reasons to be hopeful, Domalewski explained.
The Silicon Valley Bank failure is the largest since Washington Mutual’s demise in 2008 – a watershed moment that triggered a major financial crisis and crippled the world’s markets since.
Yet SVB’s failure is expected to result only in pockets of instability, mostly due to its nature as a “boutique” bank and specific portfolio favoured by US tech startups and venture capital, servicing nearly half of the market.
Additionally, US and international regulators have introduced more stringent rules since the last financial crisis, aimed at ensuring that one bank’s failure would not trigger a cascade event, harming the broader economic system.
The problems encountered by the bank “are very specific” and are not likely “to affect the entire banking sector, let alone the major banks,” Ken Leon, an analyst with the firm CFRA, told AFP.
Morgan Stanley’s analysts echoed this view, insisting in a statement: “We want to be very clear… We do not believe that the banking sector is facing a liquidity crunch”.
Authorities in the US have also expressed their confidence in the country’s banking sector, which is far more diversified across multiple industries, customer bases, and geographies.
US Treasury Secretary Janet Yellen said on Friday that the banking sector remained “resilient,” while White House economic adviser Cecilia Rouse said the sector was “fundamentally different from what it was 10 years ago”.
‘Businesses should not fail because their choice of bank failed’
Some high-tech companies were hit hard by the news of SVB’s failure, however. On Friday, streaming device maker Roku said they had “around $487 million” (€456.9 million), or 26 per cent of its cash reserves, deposited at SVB.
Roku’s shares have gone down 10 per cent in extended trading, but the company said that “it continues to believe that its existing cash and cash equivalents balance and cash flow from operations will be sufficient […] for the next twelve months and beyond”.
Armand Domalewski
Data analyst
But smaller companies spent Saturday in heightened panic, as some of the startups depending on SVB became concerned over their ability to pay their employees post-shutdown.
Others scrambled to look for a bank to replace SVB even before markets reopen on Monday.
This is understandable, according to Domalewski, as fairly small businesses feeding a hundred employees feel “they’ll run out of money very very fast”.
“Businesses should not fail because their choice of bank failed,” Domalewski said.
“Requiring every individual business to do constant due diligence wherever they put their money creates a huge amount of stability”.
“But I do think also, they should just wait to see what happens till Monday”.
‘Irrational’ premise still led to ‘rational’ movement of cash
Yet the freakout persisted throughout Saturday, with emails from various firms said to have been circulating imploring companies to move their cash from other specialised banks to a top four bank as soon as possible.
“What this really cascaded into then is all of the regional banks being reviewed and many of the VCs have now looked at all this and said, ‘Okay, well my distrust is not only with SVP, but it’s actually with the broader read of the banking sector outside of the top four,'” Kaji explained.
“And so everyone right now is looking at their company’s funds and saying we simply just can’t take a chance”.
“When you have mass hysteria, the cat’s already out the bag… the premise based on which people moved money was probably irrational, but once it started the movement of the cash it became rational”.
“Because you never want to be the last one out. No one wants to be stuck in that same position with another bank” that is failing in the same way, Kaji concluded.
Protections in place to make all the difference?
In Europe, German and UK regulators are said to be monitoring the fallout of the SVB Group, although expectations of its overseas future were mostly optimistic on Saturday.
The group has offices in both European countries, as well as Ireland, Denmark, and Sweden, but its international arm is thought to represent a minor part of its overall business, with just 3 per cent of its total client funds coming from abroad.
On Friday afternoon CET, SVB’s UK branch said in a statement that it “has been an independent subsidiary since August 2022 with a separate balance sheet to the SVB Financial Group and an independent UK Board of directors”.
And Domalewski believes that the protections in place since 2008 will make all the difference come Monday.
“There’s a reason that we did all this since 2008 — passed a lot of new financial regulations formally and informally to make our banking systems a little more boring, a little more arduous, but to like prevent things like this from causing a full-scale crisis,” he explained.
“It’s been a long time since we’ve had a bank failure,” Domalewski said, “and people have forgotten what that’s like”.
Additional sources • AFP