Most of Silicon Valley Bank’s investments were uninsured

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Siicon Valley Bank is aptly named: it held the funds of hundreds of US tech companies and was a vital player in the valley’s economy. But on Friday, it became the second largest bank failure in US history after a rapid run on its deposits. About $175 billion in customer accounts were taken over by the Federal Deposit Insurance Corporation (FDIC), which is now tasked with returning money to the bank’s customers.

But more than 85% of the bank’s deposits were uninsured, according to estimates in a recent regulatory filing. That’s because FDIC deposit insurance is meant for everyday bank customers and caps out at $250,000. Many Silicon Valley startups had millions, or even hundreds of millions of dollars invested – money they used to run their companies and pay employees. Right now, no one knows how much of that money is left.

The tech sector was already going through a tough macroeconomic climate, with discounts galore and stock prices sinking fast. The collapse of Silicon Valley Bank is likely to exacerbate these problems – and could threaten the wider economy. “It’s like the Lehman Brothers era for Silicon Valley,” said one Silicon Valley founder who has millions of dollars tied up in SVB. “It feels like something that should never have happened, because it’s such a trusted organisation. ” The person spoke on condition of anonymity because they are concerned about losing customers with their ties to SVB.

A bad bet

SVB was founded in 1983 and is headquartered in Santa Clara, which is in the heart of Silicon Valley. The bank was the nation’s 16th largest, and has long prided itself on its close relationship with tech entrepreneurs, calling it “the economy’s financial partner innovation” it was. The bank claimed at the end of 2022 that “nearly half” of the US venture-backed startups used its services.

But on Wednesday, SVB announced that it was facing liquidity constraints, and that it was holding an emergency fundraiser and selling US government bonds at a loss to strengthen its position. This news caused widespread panic throughout the valley, with many companies scrambling to withdraw their money before it was too late.

As fear spread, investors pulled out of bank stocks at a greater rate, with the four largest US banks losing about $52 billion in market value on Thursday.

Many technical leaders urged companies that banked with SVB not to panic or withdraw their money. But the risk for these startups was too high, and self-fulfilling bank runs ensued. SVB’s stock price fell 60% on Thursday, and trading was halted on Friday morning. By noon, the FDIC had taken control of the bank. The only bank failure bigger than this one in American history was Washington Mutual, which had about $300 billion in customer deposits before the 2008 financial crisis.

Most banks, by nature, use their customer deposits to make loans, and then make money off the spread, which allows them to earn income and their customers to earn interest. . But financial institutions are now facing a changing economic environment, in which the cash-free period of ultra-low interest rates has come to an end while the Federal Reserve tries to keep up with inflation with making it more expensive to borrow.

Some smart investments made by banks two years ago have since turned sour, says John Rizzo, senior vice president, public affairs at the DC-based Clyde Group. This was a big part of SVB’s problem: $91 billion worth of Treasuries (usually safe investments) that the bank bought with customer deposits, had lost about $15 billion in value due to rising interest rates.

(Rizzo also pointed to the struggles of crypto-focused Silvergate Bank, which announced it would cease operations this week.) “When interest rates rise and money gets tighter, you tend to find out who made a bad bet,” he said. saying. “You can see the bubble burst in some of these risk funds, and over the last few weeks, we’ve been finding out which financial institutions were overextended for them . ”

Running insurance

The failure of SBV has an immediate impact in Silicon Valley. The aforementioned startup founder said that they started banking with SVB right at the founding of their company several years ago, “because it was like the de facto standard.”

“It’s been around for 40 years,” they said. “It was a highly trusted organization that everyone was banking on. “

The founder’s company held all its assets, worth millions of dollars, in SVB. When the panic started on Wednesday, the founder started withdrawing most of their money, but said the process of creating a new business bank account would take several days.

The FDIC said customers will have full access to their insured deposits up to $250,000 this Monday. But $250,000 is “chump change” compared to what most tech companies invested in SBV, the founder says. They estimate that there are “hundreds if not thousands of companies” with millions of dollars tied to the bank.

“The FDIC insurance is designed to give the everyday investor confidence that they will get their money back with a run,” Rizzo says. “But as we’re finding, that creates a problem big if you’re way over the threshold.”

The founder says that his company is in a better position than many others: since the company generates income and its team is only about 30 people, they will be able to record -to make payments for the coming months. After that, they are not so sure. “We don’t know if we have to lay off or lay off workers. We don’t know if we will ever get money beyond the insured amount,” they said.

And many startups in Silicon Valley don’t generate revenue at all, instead relying on fundraising rounds from venture capital firms. “Let’s say you’re a high-flying startup that banked with SVB, raised $100 million, burns a million dollars a month, and has no revenue,” the guy said. founder. “You’re really f—ed.”

The founder says a common sentiment he’s heard from other tech entrepreneurs is that “people are hoping that someone, whether it’s the government or a bigger bank, will put in the rest of the investors.” – out ” Some financial veterans, including former Treasury Secretary Larry Summers, have begun calling on the government to make sure investors are made whole, even if their accounts exceed $250,000.

The failure of SVB sent shockwaves throughout the banking system. Institutions of similar size, including First Republic Bank, Signature Bank, and PacWest Bancorp, suffered double-digit stock declines.

The founder says that the failure of SVB could fundamentally change the way money flows in Silicon Valley, with people possibly becoming more reluctant to trust smaller institutions. “People will be a lot more cautious, and that’s a bad thing,” they say. “Maybe more money will accumulate in the hands of the bigger players.”

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