Three lessons from the failure of Silicon Valley Bank

What can the collapse of Silicon Valley Bank teach us about the tech industry?

First, not much.

- Advertisement -

It’s true that SVB, as insiders called it, was a Silicon Valley institution, with many of the tech industry’s best-known startups and investment firms as clients.

It is also true that bank failure will have a multiplier effect across the entire tech sector in the near term because companies that have deposited their money will be looking to withdraw their funds and pay their salaries.

But it wasn’t the loans to that contributed to the collapse of Silicon Valley Bank risky startupsneither dodgy cryptocurrency bets, nor any other ill-considered technological schemes.

It was a traditional bank panic, blasted in 2021 by a string of bad decisions.

The stock market was booming that year, interest rates were near zero, and money was flowing into the technology sector.

Many startups deposited their funds with Silicon Valley Bank, and the bank, in turn, took the funds and invested them in, among other things, a variety of long-term bonds.

These investments seemed relatively safe then, but they became riskier last year as interest rates rose and bonds lost some of their value.

This year, with tech investments slowing down and start-ups trying to get cash out of the bank to pay their expenses, Silicon Valley Bank has found itself having to sell some of its loss-making bonds and seek fresh capital to meet their obligations.

The bank could have survived all this, but when it explained to its customers (in a bad way) what had happened, some worried that the bank was in trouble.

VC investors were horrified and told their portfolio startups to do it he will withdraw all funds they had deposited with SVB.

Other customers saw it too and panicked, and voila! We have a bank run.

Perhaps this is the only moral of the Silicon Valley Bank story:

If you’re a bank and many of your customers are tech startups whose ability to raise money fluctuates when interest rates rise, don’t invest their deposits in long-term bonds that will lose value if interest rates rise.

But I think we can learn other lessons from this situation.

The first is that although Silicon Valley Bank it was small by Wall Street standards (until January it was sixteenth largest bank in the country, with about $200 billion in assets), held a privileged position in the tech community.

Founded in 1983, the bank enjoyed a gold reputation within Silicon Valley.

It was known for taking risks with start-ups that no other bank wanted to.

Last week, when it collapsed,

Several start-up founders have reported getting their first business loans or credit cards from Silicon Valley Bank.

Some workers in the sector insured their home or car loans with that bank.

Relationships like these are invaluable, and Silicon Valley Bank is likely to be acquired by a major bankrupt Wall Street bank in the near future.

This major bank will take over the assets and liabilities of Silicon Valley Bank, compensate its depositors, and no one will suffer catastrophic losses (except SVB shareholders).

At best, there will be a swift and orderly transfer of Silicon Valley Bank’s assets and liabilities to a new bank.

In the worst-case scenario, no buyers emerge, bank customers will have to wait weeks or months to access their funds, and the entire startup ecosystem will collapse as many fail to pay their salaries, which would be catastrophic. .

THE second lesson is that Silicon Valley Bank’s clientele, who spend so much time online, may have contributed to its downfall.

At most mid- to mid-sized regional banks, what happened at Silicon Valley Bank may not have caused a bank run.

Banks sell assets all the time.

When they face liquidity problems, they raise short-term capital to fix them.

More often than not, customers don’t even know about it or aren’t interested.

But SVB depositors are not ordinary customers.

They’re startup founders and investors, the kind of people who check banks’ securities books, pay close attention to risk and volatility, and (most importantly) talk to each other all day online.

As soon as some industry players started asking questions about the company’s solvency, Slack channels and Twitter profiles were activated with serious warnings venture capitalists and in a short time many people were afraid.

The third lesson we can learn from the Silicon Valley Bank collapse is that theBanking regulation works.

As soon as it became clear on Friday that the bank would not recover, the Federal Deposit Insurance Corporation did what it always does when a bank fails:

he intervened, took control and attempted to compensate the bank’s customers.

As a result, customers who had $250,000 or less on deposit in insured accounts will soon be able to access those funds.

Hopefully, a large bank will smoothly incorporate the old SVB, compensate those who have deposited larger sums and there will be no domino effect:

there will be no taxpayer bailouts, no mass start-up failures, just plain old bank failure.

In recent years, some leaders in the tech sector have called regulators and government officials slow, corrupt, and a brake on innovation (some of those same leaders begged the government for bailouts on Friday).

But since Silicon Valley Bank was mostly a regular bank, not a deregulated cryptocurrency casino or fintech startup, where investors and depositors might have no recourse if their money disappeared, its failure is likely to be more an inconvenience rather than a long-term crisis.

If that happens, Silicon Valley will have to thanks regulation for helping him survive.

c.2023 The New York Times Society