A few weeks ago, the ecosystem witnessed the second-largest bank failure in US history since the 2008 financial crisis, when the Silicon Valley Bank collapsed on March 10, 2023.
Before the collapse, about half of all US venture-backed startups kept cash with Silicon Valley Bank, including crypto-focused venture capital funds and some digital asset firms. Consequently, because SVB held a lot of crypto startups and VCs as customers, SVB’s dramatic plummet rubbed off on Silvergate and Signature, the two main banks for crypto companies.
In a press release on Wednesday, March 8, Silvergate Capital announced its intent to wind down operations and to voluntarily liquidate Silvergate Bank in line with a motive to preserve the residual value of its assets.
This happened swiftly after Silicon Valley Bank, a major lender to startups, made a statement that it needed to raise $2.25 billion to shore up its balance sheet.
Alarmed by this development, depositors withdrew more than $42 billion, dramatically leading to the bank’s collapse. Meanwhile, Signature, which is also a big lender in the crypto industry, was seized on Sunday (three days after SVB’s fall) by the New York state regulators due to systemic risk.
Accordingly, this article delves into the steps the U.S. government and FDIC took to salvage the situation and how the banking trifecta’s failure affects your startup.
What really happened?
A glance at the unfolding of the whole event revealed that the panic started when SVB Financial Group announced its plan to raise $2.25 billion through a share sale, in addition to the sale of securities worth $21 billion from its portfolio. Following that action, what struck the camel’s back was when the bank disclosed a $1.8 billion after-tax loss on the sale of these investments.
SVB Strategic Actions/Q1’23 Mid-Quarter Update, March 08.
Consequently, customers began to withdraw their deposits, which led to a rapid downward slope in the bank’s stock. As a result of the rising interest rates, depositors received higher interest payments while creditors got lower interest earnings, putting the ongoing crisis in another gear. In addition, the value of Silicon Valley Bank securities went down as their ownership of government securities (bonds) went bearish due to the rising interest rates.
Selling off these securities to raise cash appeared to be the next swing for SVB, but unfortunately, their reduced value led to a shortfall. So they resorted to raising an additional $2 billion in capital, but this was the heat that reverberated through tech communities.
Following SVB’s shutdown on Friday, bank regulators had to close New York-based Signature Bank three days later to cushion the effect of the plummeting streak.
The National Venture Capital Association says more than 37,000 small businesses with more than $250,000 in deposits had accounts with Silicon Valley Bank. With the bank’s financial crisis, the FDIC says these businesses may struggle to access their funds for a significant period.
Still, it drills down to how this trend will shape the banking industry and affect startups moving forward. The best way to grasp this is to understand the timeline of these woes.
The Timeline
The Silicon Valley Bank deposit grew from around $200 billion in 2019 to shy of $400 billion at the end of 2021.
This impressive growth had SVB looking for alternative ways to deal with the money in their possession. So they poured in 56 percent of their assets (around $80 billion) in mortgage-backed securities.)
In 2022, the US central bank began raising rates at the fastest rate in history in a bid to fight inflation.
The tech industry was coincidentally facing a slowdown in investment and new deposits, which made many tech-focused companies withdraw cash to fund operations.
SVB Total Deposits 2018 to 2022 from Chartr
Unfortunately, Silicon Valley Bank had invested its assets in government bonds that were marked-to-market (i.e., valued at the current market price). As a result, the bank incurred unrealized losses when interest rates rose and bond prices fell.
Now, customers at SVB were withdrawing more than they were depositing. So the bank had to sell its government securities to make funds available (this was a terrible time to sell the bonds so their unrealized losses became realized losses before maturity)
The next move of the bank was to shore up its balance sheet by raising $2 billion, but this did not only fail but also alarm prominent investors.
The panic over SVB’s solvency began to spread, and depositors began to withdraw their capital at a dramatic rate.
California regulators intervened on Friday, March 10, seizing the bank and appointing the Federal Deposit Insurance Corporation (FDIC) as receiver.
The next Monday after that development, the Deposit Insurance Fund was approved to be used to make all depositors (as well as deposits that wouldn’t be covered by deposit insurance) at SVB and Signature bank ‘get their money back.’
How each collapses affects the startup’s ecosystem
The collapse of SVB Bank has undoubtedly left a mark on the startup community, as many entrepreneurs are struggling to assess the repercussions for their businesses. Critical financial services and resources have also become scarce for many who have financial relationships with the glorified banks for startups.
Many tech companies with money tied up with SVB still have unanswered pressing questions. For example, what do they do when they need to pay employees or make pressing investments in operations?
While the impact of SVB’s fall on startups and VCs is not yet clear, Castle Hill, a due diligence firm, claims that several funding vehicles for African startups banked with SVB before its demise and are vulnerable to this hit.
An analysis on Reuters shows a list of companies across the globe that have their deposits with the bank, including Roblox, Roku, Buzzfeed, Sunlight Financial Holding Inc., Vir Biotechnology, Trustpilot Group PLC, and Nitro Software, among many others.
The situation will have less severity for fintech companies that have just a portion of their funds tied up with SVB. An excellent example is Chipper Cash, an African fintech unicorn.
Amid the uncertainty, one thing is sure: many startups are currently nursing their wounds from SVB bank failure. For example, the crisis grossly impacted Indian startups like cross-border SaaS firms and Y Combinator’s portfolio firms. According to The Economic Times, Indian startups had deposits worth $1 billion in the beleaguered Silicon Valley Bank, as revealed by Rajeev Chandrasekhar, MoS IT.
What is more important right now is determining the next steps to salvage the situation and keep startup customers calm. This task can seem overwhelming for businesses.
There’s a silver lining.
The FDIC has guaranteed deposits of up to $250,000. But this intervention is not guaranteed to spread far since it depends on the size of the company and SVB customers (like VOX media) using their instruments (i.e, revolver loans or credit cards.)
The bottom line is that SVB’s fall will have a lasting impact on Interest rates, the technology and start-up industry, the banking sector, Banking regulations, the broader financial system, and of course, the economy.
What the U.S Government and FDIC is doing about the situation
From the look of things, this is a bailout regardless, as the banks went under and the government is stepping in to help.
According to a press release from the White House, this isn’t a 2008-esque situation since SVB and Signature aren’t going to be revived and the money for depositors would not come from taxpayers.
Shortly after SVB’s fall, the Federal Reserve Board, the Department of the Treasury, and the FDIC jointly announced that they would create a lending facility for the nation’s banks to buttress them against the financial effects welcomed by SVB’s Friday collapse.
That funding, the announcement said, will come from loans from the newly created Bank Term Funding Program.
The Biden administration has announced that customers of Silicon Valley Bank will have full access to their deposits to backstop billions of dollars in uninsured money amid panic that the ban’s fall will lead to further catastrophe.
Speaking on Sunday, March 12, Federal regulators said in a statement, “Today we are taking decisive action to protect the U.S. economy by strengthening public confidence in our banking systems.” However, stock and bond investors in SVB will not be protected by the $250,000 ceiling waiver.
“The bank’s equity and bondholders are being wiped out. They took a risk as owners of those securities. They will take the losses,” a senior Treasury official was quoted by NPR as having mentioned.
Update 30/3/2023:
First Citizens has agreed to acquire the majority of Silicon Valley Bank’s assets after the tech-focused financial institution collapsed earlier this month, triggering a chain reaction that caused another bank to fail.
Regulators had already guaranteed depositors in both banks would be able to access their funds. The deal, announced on Sunday, appeared to have bolstered trust in US regional banks, resulting in the opening of 17 former SVB branches as First Citizens branches on Monday 27th of march 2023.
The FDIC expects the Silicon Valley Bank failure to cost its Deposit Insurance Fund around $20bn. Customers of SVB will become customers of First Citizens, headquartered in North Carolina, which has more than $100bn in total assets and over 500 branches across 21 states