News from California that authorities closed Silicon Valley Bank (SVB) on Friday shocked the tech start-up and venture capitalist world, with its sudden collapse over two days roiling the market by Saturday.
SVB – the 16th largest bank in the US but a crucial bank for the startup scene – was shut down by regulators on Friday after a bank run dealt it a fatal blow following attempts to recoup deposit losses and the sale of government 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 considered too big and too strong to fail,” Samir Kaji, a former banker who spent more than 20 years in the industry, told Euronews Next.
Still, SVB was hit hard by funding drying up over the past year in the tech and startup sectors, as well as the Federal Reserve’s plan to aggressively raise interest rates to fight inflation.
The bank was backed by billions of dollars worth of bonds, but when they had to sell them at a time when interest rates were high, they sold them at a significant loss.
But SVB’s clients were largely startups and other technology-centric companies that began to become more cash-strapped over the past year.
“When they had the recapitalization announcement (on Wednesday),” he recalled, “what ended up happening was there was a ‘town hall’ call with their clients, which are mainly these VC firms”.
And it actually caused more panic than it did to calm, Kaji explained.
“There were streams of emails, voicemails, calls, Slacks, texts, with all the VCs pleading with their companies to move capital out of SVB, creating the $42 billion that left the bank.”
SVB’s ‘specific’ problems result in only pockets of instability?
SVB is expected to reopen on Monday with the FDIC in charge. It said all insured depositors would have full access to insured deposits by 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 — is likely to resolve the situation,” Armand Domalewski, a data analyst with a background in the Det the economic policy told Euronews Next.
“People in the US think their deposits are only insured up to $250,000 (€234,000), which is legally correct. But generally what the FDIC has been trying to do since 2008 is arrange sales to other banks so that customers are transferred from one day to the next. They do not lose their deposit”.
The people who invested directly in SVB will be wiped out, but depositors have reason to be hopeful, Domalewski explained.
The Silicon Valley Bank failure is the biggest since the demise of Washington Mutual in 2008 – a watershed moment that triggered a major financial crisis and paralyzed world markets ever since.
Still, SVB’s failure is only expected to result in pockets of instability, largely due to its nature as a “boutique” bank and specific portfolio favored by US tech startups and venture capital, serving nearly half of the market.
In addition, US and international regulators have introduced stricter rules since the last financial crisis, aimed at ensuring that a bank’s failure would not trigger a cascading event that damages the wider financial system.
The problems the bank is facing “are very specific” and are unlikely to “affect the entire banking sector, let alone the big banks,” Ken Leon, an analyst at the firm CFRA, told AFP.
Morgan Stanley analysts echoed this view, insisting in a statement: “We want to be very clear… We do not believe 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 10 years ago”.
‘Companies should not fail because their choice of bank failed’
However, some high-tech companies were hit hard by the news of SVB’s failure. On Friday, streaming device maker Roku said it had “about $487 million” (456.9 million euros), or 26 percent of its cash reserves, deposited with SVB.
Roku’s shares are down 10 percent in extended trading, but the company said that “it continues to believe that its existing cash and cash flows from operations will be sufficient (…) for the next twelve months and beyond”.
But smaller businesses spent Saturday in heightened panic as some of the startups that depended on SVB worried about their ability to pay their workers after the shutdown.
Others tried to look for a bank to replace SVB even before markets reopened on Monday.
This is understandable, according to Domalewski, as fairly small businesses feeding a hundred employees feel that “they run out of money very, very quickly”.
“Companies should not fail because their choice of bank failed,” Domalewski said.
“Requiring every single company to do constant due diligence wherever they put their money creates a tremendous amount of stability”.
“But I also think they should just wait and see what happens on Monday”.
‘Irrational’ premise still led to ‘rational’ movement of cash
Still, the freakout continued throughout Saturday, with emails from various firms said to have circulated, pleading with businesses to move their cash from other specialist banks to a top four bank as soon as possible.
“What this really fell into at the time is all the regional banks that are being reviewed, and a lot of the VCs have now looked at all of this and said, ‘Okay, my mistrust is not just with SVP, but it’s actually with the broader reading of the banking sector outside the top four,” Kaji explained.
“And then everybody right now is looking at their company’s funds and saying we just can’t take a chance”.
“When you have mass hysteria, the cat is already out of the bag… the premise that was based on people moving money was probably irrational, but once it started moving the cash, it became rational”.
“Because you never want to be the last one out. Nobody wants to be stuck in the same position with another bank” that fails in the same way, Kaji concluded.
Protection in place to make all the difference?
In Europe, German and British regulators are said to be monitoring the fallout from SVB Group, although expectations for its overseas future were mostly upbeat on Saturday.
The group has offices in both European countries as well as Ireland, Denmark and Sweden, but its international arm is believed to represent a smaller part of its overall business, with only 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 SVB Financial Group and an independent UK board”.
And Domalewski believes the protections in place since 2008 will make all the difference on Monday.
“There’s a reason why we’ve been doing all this since 2008 — passed a bunch of new financial regulations formally and informally to make our banking systems a little more boring, a little more cumbersome, 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 it’s like”.