Ed. note: This is an ongoing story. Please check back for updates.
[Update: 8:25am PT: The uncertainty is fueling expectations that the Federal Reserve will be forced to rethink raising rates again when it meets on March 22 to make its next decision on rates. The two-year Treasury yield, a barometer for interest rate change expectations, has fallen to just above 4 percent, its biggest drop in 35 years.]
[Updated 3/13/23 7:30am PT] Members of the high-tech and venture capital communities — as well as many in the world beyond — braced today in the immediate aftermath of last week’s Silicon Valley Bank failure, the second largest failure in history.
Fears continued Monday morning: First Republic Bank, the nation’s 14th largest bank and based in San Francisco, saw its shares plummet 78% in the first hour of trading.
But some big relief came Sunday night as top U.S. federal regulators moved to take decisive action to restore confidence in the banking system. The U.S Treasury, Federal Reserve and Federal Deposit Insurance Corp. (FDIC) announced that the FDIC will take control of the bank, and protect all depositors. Most importantly, they said depositors will gain access to all of their money, not just the $250,000 minimally ensured amount that had been guaranteed before the announcement. The money will be available today, the regulators said.
The regulators also said they had taken control of New York-based Signature Bank, which had also faltered, after becoming a major banking service provider to companies in crypto markets. The regulators announced “systemic risk exceptions” for both banks. This exception allows the regulators to take extraordinary action that goes beyond what they are are minimally required to do, and is used in rare circumstances when inaction may lead to a snowballing of investor fear.
On Monday morning, President Biden also weighed in to restore confidence. “One, don’t panic. Two, no taxpayer bailout. Three, there will be accountability. And four, future action will be taken to keep this from happening again,” he said. He said he will seek stronger regulation on banks, and also pledged that no losses will be borne by the taxpayers.
The Fed also said it will open an emergency lending program to make available additional funding to eligible depository institutions. This will ensure banks have the ability to meet the needs of all their depositors.
Before the President’s remarks, premarket trading in other regional U.S. banks was showing significant drops in the stocks of First Republic Bank, Western Alliance and PacWest Bancorp. Shares in European banks were also down.
Concern centers on payrolls
On Friday, the Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation, and the FDIC was named as receiver. That came as the bank struggled to meet customers’ often-frantic requests for withdrawals of large, uninsured holdings.
However, it’s not entirely clear yet how the FDIC can take over the bank before finding an owner, and also still avoid losses (which would presumably come at a cost to taxpayers).
The FDIC’s move should forestall ripple effects that would see missed payday payrolls for high-tech startups. Such young companies have long relied on Silicon Valley Bank, which saw a dramatic rise in deposits in recent years as VC coffers grew and startups opened shop. For many, missed payrolls are the most immediate concern.
SVB depositors include many small businesses that “rely on access to their funds to be able to pay the bills that they have, and they employ tens of thousands of people across the country,” Treasury Secretary Janet Yellen said on Sunday.
The number of companies that missed the window to withdraw funds last week is not known. Reports indicate that adtech firm Acuity Ad Holdings, metaverse platform provider Roblox and set-top-box maker Roku were among those with unavailable deposits held at SVB on Friday. As well, crypto finance company Circle Internet Financial Ltd. said in a tweet that its wires to initiate withdrawal of $3.3B in USD coin reserves were “not yet processed” as of Friday.
Social media hastens meltdown
The collapse of Silicon Valley Bank, the 16th largest U.S. bank, with 8,500 employees, and a favorite lender for startups and venture capitalists, was not only a financial disaster but also a social media phenomenon.
It was the first bank run in history enabled by social media, as rumors and fears spread online about SVB’s solvency and triggered a massive withdrawal of deposits by customers and investors.
The bank run started on Feb. 23, when popular VC newsletter author Byrne Hobart published a newsletter calling out SVB’s risk. The post quickly went viral, attracting thousands of comments and shares on Reddit, Twitter, Facebook and other platforms. Some users urged others to pull their money out of SVB before it was too late.
The social drumbeat occurred against a general backdrop of institutional distrust, in the estimation of industry observer Ray Wang, founder, chairman, and principal analyst, Constellation Research.
“We’ve had such a low faith in institutions, especially post-COVID. That creates a huge issue,” he said. “People don’t trust their institutions anymore.” Wang also pointed to a lackluster IPO market as a driver of the run on SVB.
Long a pillar of the U.S. high-tech venture capital ecosystem, Silicon Valley Bank had approximately $209 billion in total assets and about $175.4 billion in total deposits as of December 31, 2022.
In many corners, the bank’s rapid downfall has been laid to the U.S. Federal Reserve Bank’s aggressive increase in interest rates. That has led to new pressures on growth-oriented, richly funded high-tech startups.
Silicon Valley Bank’s unique structure saw it rely on a relatively narrow group of depositors, and ill-advised bets on long-term bonds that were greatly affected by Fed interest rate hikes. To raise financing, the bank was forced to sell those bonds at a massive loss.
Valuations under review
“The state of the IPO market — there were far fewer last year — means that the VCs will have to be more cautious as they’re waiting for the market to get better,” said Wang. “But because of what’s going on, it’s going to be even harder for tech startups.”
Wang’s remarks to VentureBeat came Sunday, before news of the Fed bailout. He said he expected to see startups hoarding instead of deploying cash. He said the industry will closely watch data on payrolls and wire transfer rates as the story continues to unfold.
Avoiding the last crisis?
The cash squeeze comes amid recent controversy surrounding what is realistic for startups’ valuations. The Silicon Valley Bank run could spur further review of valuations.
“If startups ended up losing money at SVB, their available runway drops. This will accelerate the denouement for overvalued companies that will never grow into their valuations,” said one startup investor who discussed the SVB failure on the condition that they not be named.
“Companies always avoid repeating their last crisis, so expect them to be far more cautious about where they put their cash,” they added.
Includes reporting by Matt Marshall and Michael Nuñez.
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Author: Jack Vaughan