On Friday, the Federal Deposit Insurance Corporation announced it had acquired Silicon Valley Bank, and as we scrambled to plan coverage, one of my colleagues described the situation succinctly: “This is historic shit.”
A week later, we can all agree that they were right. But a lot has happened, and unless it’s your job to edit the news, you may have missed part of the saga, if not all of it.
This is what happened:
How it started
The drama gathered momentum midway through last week: Shares of SVB fell more than 60% on Wednesday night, as the bank said it planned to sell shares to raise capital after raising $1.8 billion. taken from the sale of some assets. The bank also indicated that it would boost its lending, reinvest capital in higher-yielding assets and attract more funding from an outside entity.
Given the recent bankruptcy of crypto bank Silvergate and SVB’s own problems due to its exposure to the venture capital and startup ecosystem (which it hasn’t done well), investors understandably got nervous and started selling SVB shares.
SVB CEO Greg Becker famously said on a phone call with clients on Thursday evening that the bank had “enough liquidity” to support its clients “with one exception: if everyone tells each other that SVB is in trouble, it becomes a challenge. ”
The executive asked VC clients to “keep calm.” He said, ‘That’s my question. We’ve been around for 40 years, supporting you, supporting the portfolio companies, supporting venture capitalists.
We all know how that went.
Around the same time, several sources told australiabusinessblog.com+ that VCs advised their portfolio companies to pull their money out of SVB for fear of a bank run.
A number of investors fear a bank turnaround, meaning enough startups will raise their capital with SVB, a situation where the financial institution could be turned upside down in terms of deposits versus demand for those funds. (Bank runs are often ironic because they can become self-fulfilling prophecies.)
One investor even told australiabusinessblog.com that many VCs advise startups to decentralize their assets across multiple banks and generally hold no more than $250,000 in SVB checking accounts. (NB: $250,000 is the maximum insured by the FDIC, meaning those funds would have solid external protection.)
SVB’s stock started in the basement on Friday as fears of a bank run became reality. Trading in the bank’s shares was halted, reportedly because the SVB was frantically trying to sell its assets so it wouldn’t close.
The SVB has also asked its employees to work from home until it has figured out the next steps.
What really happened?
To better understand how things had turned out, Alex dug deep into what led to the bank going from a relatively stable company to a going concern in just five days:
- The COVID-19 corporate boom was based in part on the fact that money was incredibly cheap: global interest rates were low to negative, so there were few places to put capital to work. This led to larger venture capital funds investing mountains of money in startups, who deposited that money into SVB, as until recently it was the main destination for startups’ banking needs.
- However, as the FT points out, the huge increase in deposits at SVB – never a bad thing for a bank – overshadowed the bank’s ability to lend capital. This meant that there was a lot of cash lying around at a time when cash was useless to see returns.
- The bank invested all that money, at low rates, in things like US Treasuries (page 6 of the mid-March update presentation).
- Later, in an effort to quell inflation, the US Federal Reserve raised interest rates, venture capital investments slowed, and the value of low-yield assets fell as the cost of money rose (bond yields trade inversely to price, so as the interest rates rose, the value of the SVB’s assets fell).
- The bank decided to sell its available-for-sale (AFS) portfolio at a loss (interest rates up, value down) so that it could reinvest that capital in higher-yielding assets. SVB wrote to investors that it “has taken these steps because we expect our clients to continue to expect higher interest rates, pressure in the public and private markets and increased cash burn levels when they invest in their businesses.”
- What did the SVB expect after all was said and done? An estimated $450 million boost to its annualized net interest income (NII).
- australiabusinessblog.com+ initially thought the bank’s shares were being sold because investors were unhappy with the $1.8 billion cost it had to pay in selling its AFS portfolio, as well as SVB’s plan to sell a few billion shares, which would dilute the existing shareholding.
- Instead, the venture and startup market was concerned. Why did SVB sell so many shares? Take such a huge load? Take such drastic measures? Worry led to fear, which led to panic. In fact, everyone was afraid that everyone else would panic and withdraw their capital, so they wanted to do it first. Any risk of capital loss was unacceptable, so people rushed not to be the last.
- It later became clear that SVB had greater unrealized losses on its balance sheet compared to peers, creating a crack in the foundation that would ultimately crater the bank as it attempted to spy on the case with the actions it took prior to the bank run.
We were stunned by the rapid demise of the SVB: “Why didn’t the bank say it was well capitalized? yesterday to what appears to be a sell-out so quickly? Our assessment at this point, pending other information, is that the panic over the bank’s health has led to such an outflow of deposits that it actually got into trouble. Banking depends on trust, and suddenly SVB didn’t have the market.”
A few hours later, the other shoe fell: the FDIC announced that it had acquired SVB, that the bank had gone bankrupt and that it would resume operations on Monday, March 13 under the direction of regulators.
“Of the many moves FDIC is making, the highest priority seems to be giving customers access to their deposits,” Natasha wrote. “The same memo states that all insured depositors will have ‘full access’ to insured deposits by Monday morning, March 13, and official controls will ‘continue to clear’. Uninsured depositors will receive a prepaid dividend within the next week, the memo says, and future dividends could be made if FDIC sells SVB assets.
The news that the SVB had failed became the second largest US bank doing this ruined the weekend for many startup founders and venture capitalists. How were startups going to pay for things while the mess was being sorted out?
It is important to remember that at this point no one knew how it would turn out. Startups and investors had little visibility into the FDIC’s plans for SVB, and there was no telling how long companies with money locked up in the bank would have to go without cash.
Alex examined what was at stake:
A large number of startups have been sitting on huge sums of money at the end of the last startup boom. They depended on that money to get through the current downturn. What happens to those companies if they bank with the SVB and do not have that capital at their disposal? The later the start-up phase, the greater the likely need for cash, and the more difficult it will be to bridge it with cash.
Some of these money rich unicorns are also very upside down when it comes to their valuations. Who exactly is going to offer them cash at a price similar to their previous round? Probably nobody.
It’s a mess at the moment. This crisis will kill a large number of startups, either quickly or simply by adding enough operational friction to bring them to their knees.
The (un)stablecoin situation
As if the crypto industry hadn’t had bad enough the week with the closure of Silvergate Bank, it was announced Friday that one stablecoin in particular, USDC, had held some of its backing capital with SVB, funds now likely to be illiquid for at least several days. USDC is the second largest stablecoin by market capitalization.
USDC’s issuer Circle said the next day that “3.3 billion of ~$40 billion in USDC reserves remains with SVB,” or about a third of the money the company said it had in January. Following that announcement, USDC stepped away from its $1 target to trade just 88 cents.
Meanwhile, Signature Bank, a major lender to the crypto ecosystem, became the second victim of the banking crisis on Monday when regulators shut down the bank, saying it had “created a systemic risk and could threaten the US banking system.” About 30% of the bank’s deposits came from the crypto industry.
“The Signature Bank closure serves as a one-two punch as concerns mount about the vulnerability of any bank exposed to the crypto industry,” Francesco Melpignano, CEO of Kadena Eco, told australiabusinessblog.com+. “With only a small number of publicly traded banks associated with the crypto space, many investors are rushing to place bets against them.”