What’s happening with SVB?
Recent news regarding the Silicon Valley Bank (SVB) has caused a stir in the domestic US markets and is sending shock waves internationally. As the term “bank run” has reentered the public lexicon, we are providing our insight into what has happened and the current state of the situation to help decision making in this environment.
I invite you to reach out directly to me, or any Progress Partners team member, with questions regarding this situation or how it might impact your business. We are actively monitoring the situation and are prepared to offer insight or strategic planning support to help you navigate this changing market dynamic.
The last few years have been some of the strongest for companies looking to raise capital, with 2021 shattering records. Startups flush with cash made significant deposits at their banks. SVB stated on their own website that they are the bank of choice for half of all startups. SVB needed to invest this huge influx of deposits, and their vehicle of choice was lower risk mortgage bonds.
On each of our last 3 quarterly newsletters, Progress Partners has discussed the Federal Reserve’s aggressive interest rate increases, totaling 8 consecutive hikes in the last 9 months. Whenever interest rates increase, the value of existing bonds decrease, especially ones bought in very low interest environments like 2021 (March 2021 saw a Fed Funds rate of 0.07% compared to March 2023’s 4.57%). Industrywide, the Federal Deposit Insurance Corp. (FDIC) reported that U.S. banks’ unrealized losses on available-for-sale and held-to-maturity securities totaled $620 billion as of December 31st, 2023. This compares to $8 billion the year before.
For many banks, these losses don’t pose an existential threat. The case is different for SVB for 2 reasons:
- Startups have found themselves having a tougher time raising capital, which means they need to tap into their deposits. Withdrawals have ramped up in recent months, meaning SVB needs to have more cash on hand and less cash in investments (so SVB had to sell their securities held for a loss).
- This week, SVB spooked the market by booking $1.8B in losses and announcing an emergency equity raise. Clients, fearful of SVB becoming insolvent, rushed to withdraw their capital (often at their investors urging) causing a bank run.
Today the FDIC announced that they have taken control of the bank, in what amounts to the second largest bank failure of all time behind 2008’s Washington Mutual. The FDIC has committed to allowing insured depositors access to their funds by Monday morning. Deposits with funds exceeding the insurance cap of $250,000 will get receivership certificates for their uninsured balances. This will present short term liquidity challenges for SVB clients.
Progress Partners’ Viewpoint
While many have jumped to comparisons of Lehman and Bear Stearns, Progress Partners takes a more measured approach. We see no signs that this is a systemic liquidity problem.
We do not believe this environment is anywhere near the magnitude of the 2008/2009 financial crisis. The financial sector and the Federal Government are both aligned on the need to keep bedrock institutions strong and protect the integrity of the system at all costs. SVB was not designated a systematically important financial institution (“SIFI”, colloquially known as “Too Big to Fail”), so any long-term implications will mostly be limited to cost of capital and deposit rates. But this will certainly spur regulators to take another look at the stress tests smaller regional banks go through.
The economy is strong by most metrics and while this will cause a short-term chill and angst to private tech companies, we do not believe the medium or long-term consequences will be significant. Financial investors have been active in Q1 and we believe this rate of investment will increase during 2023.