Feds bail out SVB depositors to bolster US banking system

Members of the high-tech and venture capital community—and many others around the world—were gearing up today in the wake of last week’s bankruptcy of Silicon Valley Bank.

Some relief came Sunday night as top US federal regulators took decisive action to restore confidence in the banking system. The US Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) announced that the FDIC would take control of the bank and protect all depositors. Most importantly, they said depositors would get access to all of their money, not just the minimum guaranteed amount of $250,000 that was guaranteed before the announcement. The money will be available today, regulators said.

The quick response included another takeover of the bank. Regulators have taken control of New York-based Signature Bank, which has become a major provider of banking services to companies in the crypto markets. Regulators announced “systemic risk exemptions” for both banks, allowing uninsured deposits to be paid in full.

It focuses on payroll

On Friday, Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation, and the FDIC was appointed receiver. This happened as the bank struggled to meet customers’ often frantic requests for withdrawals of large, uninsured shares.

The FDIC’s action to ensure the availability of deposits is intended to ensure the resilience of the overall banking system. This should prevent ripple effects that would result in the loss of payday payouts for high tech startups.

Such young companies have long relied on Silicon Valley Bank, which has seen a dramatic increase in deposits in recent years as VC funding grows and startups open stores. For many, missing payrolls are the most pressing concern.

Silicon Valley Bank’s depositors include many small businesses that “rely on access to their funds to pay the bills they have and employ tens of thousands of people across the country,” Treasury Secretary Janet Yellen said Sunday.

The number of companies that missed the payout window 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. Cryptocurrency finance company Circle Internet Financial Ltd. also said in a tweet that its wire transfers to initiate a withdrawal of $3.3 billion from USD coin reserves “have not yet been processed” as of Friday.

The collapse of Silicon Valley Bank, the 16th largest bank in the US and a favorite lender of startups and venture capitalists, was not only a financial disaster but also a social media phenomenon.

It was the first ever bank run made possible by social media as rumors and concerns about SVB’s solvency spread online and resulted in massive withdrawals by customers and investors.

The bank run began on February 23, when the author of the popular VC newsletter Byrne Hobart published a bulletin highlighting the risks of SVB. The post quickly went viral, attracting thousands of comments and shares on Reddit, Twitter, Facebook and other platforms. Some users urged others to withdraw money from SVB before it was too late.

According to the assessment of industry observer Ray Wang, founder, president and principal analyst of Constellation Research, the social drumming took place against a backdrop of general distrust of institutions.

“We had such low faith in institutions, especially after COVID. This creates a huge problem,” he said. “People no longer trust their institutions.” Wang also pointed to the weak IPO market as a factor driving the SVB run.

Long a pillar of the US high-tech venture capital ecosystem, Silicon Valley Bank had approximately $209 billion in total assets and approximately $175.4 billion in total deposits as of December 31, 2022.

In many corners, the bank’s rapid collapse was attributed to an aggressive increase in interest rates by the Federal Reserve Bank of the United States. This has led to new pressure on growth-oriented, high-tech, high-tech start-ups.

Silicon Valley Bank’s unique structure consisted of a relatively small group of depositors and unwise bets on long-term bonds, heavily influenced by the Fed’s rate hikes.

Valuations under review

“The state of the IPO market – there were far fewer of them last year – means that VC funds will have to be more cautious as they wait for the market to recover,” Wang said. “But with what’s going on, it’s going to be even harder for tech startups.”

Wang spoke to VentureBeat on Sunday ahead of the news of the Fed bailout. He said he expects startups to stockpile instead of spending cash. He said the industry would watch payroll and bank transfer rate data closely as the situation evolved.

Avoiding the last crisis?

The cash constraint comes amid recent controversy over what is realistic for startup valuations. A run on the Silicon Valley Bank could spur further valuation reviews.

“If startups have lost money in SVB, their available runway goes down. This will speed up the solution for overvalued companies that will never reach their valuation,” said one start-up investor who discussed the collapse of SVB with the condition that they would not be disclosed.

“Businesses always avoid repeating the last crisis, so expect them to be much more careful about where they put their cash,” they added.

Includes reports by Michael Nunez.

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