SVB Financial Group has been the headline since Friday after labeling itself the second-largest financial failure in banking history ever. The start-up-focused lender collapsed and roiled global markets as the concerns raised from the occurrence are endless.
Until Wednesday, Silicon Valley Bank served its best as a well-capitalized institution looking to raise funds. But the situation changed drastically in the next 48 hours. Apparently, SVB has ruined its long-standing status in the community which lasted for the past 40 years.
Regulators shuttered SVB as soon as they realized the world had never seen a financial tragedy as such ever since Washington Mutual in 2008. Later on Wednesday, the commercial banking company announced it had to immediately raise $2.25 billion to improve its balance sheet.
Following the news outbreak, many uncomfortable questions were raised: Would it be the beginning of an upcoming financial crisis or the end of several multi-millionaire companies that had confidently chosen SVB over any other banks? What will happen to the insured and uninsured deposits made in the bank?
What Is SVB?
If you are a techie, then you might not necessarily need an introduction to SVB. with fewer than 20 branches, Silicon Valley Bank was a financial conglomerate that mainly focused on start-up ventures. Tech firms and venture capitalists are the other two areas where their assistance is generally provided.
More specifically, Silicon Valley Bank is the 16th largest financial institution in the United States and was founded in 1983. In a short while, SVB acquired the grip to stick in the financial market by offering several services to the burgeoning tech sector.
As of 2021, SVB proclaimed to have dealt with almost half of the venture-backed startups. Interestingly, the commercial bank is also a banking partner to many popular venture capital firms that fund start-ups.
This strategy helped SVB when they weren’t financially stable. But the game changed when SVB managed to stand on its own, eventually triggering the venture capital companies to provide funds in abundance to support burgeoning tech companies and other start-ups.
But they couldn’t hold onto the unmatched success for a long time as SVB failed with more than $200 billion in assets, making it one of the largest US banks to fail ever.
On Wednesday, SVB signaled a potential cash crunch. Initially, it tried to sell off its assets and then realized that the shares won’t suffice, SVB went to sell itself. However, the whole thing frightened investors and eventually, it became the talk of the town.
After sending shock waves across the US, many investors began to withdraw large sums of their deposits, ultimately, pushing SVB to its demise.
What Happened To SVB?
Silicon Valley Bank began to sink after noticing signs of financial troubles earlier this week. The bank generally operates by accepting deposits and investing them in safe securities like bonds. But when the Federal Reserves heightened the interest rates, the bonds in which SVB invested became worthless.
On top of that, there has been a noticeable slowdown in venture capital leading to a slower deposit inflow and clients also started to withdraw their money out of the blue.
After the parent company of SVB, SVB Financial Group announced they were short in cash, the markets were spooked, and their share price plunged. By Friday morning, massive venture capitals like Union Square Ventures and Peter Thiel began to pull out their money when it was still possible.
Although SVB was one of the leading financial institutions in the United States, it had an Achilles’ head as it often concentrated to give exposure to a single industry.
SVB usually catered to private equity and venture capital. Since it was a lucrative business for SVB, they never thought of a backup project and most probably, it must have increased their chance to take risks.
According to Alexander Yokum, an analyst at CRFA Research, having more than 50% of business in a particular industry is quite dangerous, as the company will sink together with the business decline. He further added that the fall was pretty “quick.”
Although SVB was one of the largest banks in America, it saw its destruction in just the course of two days.
How Does The SVB Crisis Affect Its Investors?
From 2004 to 2007, there was no detectable bank failure, and that was apparently the second-longest stretch without a bank failure in the US after the 2008 financial tragedy. The US economy was quite good when suddenly the world woke up to the news about the SVB crisis.
If everybody had not freaked out at the same time, then SVB would have still been standing with its head high in the financial market. With that being said, it is noteworthy that a bank will not shrink alone, but it will take major big names along with it on the way down.
As per The Brooklyn Institution’s senior economic fellow, Aaron Klein, the key to baking is “trust and confidence.” And when one of the factors gets dragged out, the entire system becomes less stable.
In accordance with Klein, Yokum said that it is likely for a couple of other selected banks to run into trouble in the coming days, except the banks like the Bank of America, and JP Morgan.
He claims that these big ones cannot touch the ground as they are focused on diversified business. If one collapses, they have plenty of other businesses to balance the equation. However, Yokum is pretty much confident as he added that Banks like JP Morgan would not be closer to the line of selling securities.
He further added that things will worsen if the Fed continues to increase the rate of interest. In reality, the Fed is intending to bring down inflation by cooling down the economy.
But, Yokum has pointed out that if the rates go up, then there is more chance for other banks that are trying to take a diversion from their destruction, to end up in the worst condition.
But still, it is not recommended to withdraw your cash from your local banks, as it will only add up to the current financial crisis.
Why Was SVB The Number-One Choice For Tech Companies?
To know the answer, you don’t necessarily have to dig into the roots of SVB, as you can see its influence on tech companies if you take a look around for the event sponsor when it comes to tech conferences. After taking good notice of the bank, the techies began to trust it like anything.
But SVB’s sponsorship was not the only factor that garnered the attention of tech companies. They also offered more services to start-up tech companies, in case they agreed to work with them.
Their services mainly focused on such deals which no other reputed banks would cater to, like providing housing loans for early employees.
Plus, SVB was more particular in lending money to tech start-ups, when in actuality, tech businesses always fail to earn profits in their first two trimesters. So, SVBs often used to play with the weaknesses of their clients, often earning them advantages rather than disadvantages.
But, many startup founders like Sean Byrnes have noted that they have enjoyed the benefits offered by SVB for years. While other companies used to mock beginners, SVB used to work with founders who were not even American citizens, he explained.
However, SVB had a powerful; strategy as they received potential stock warrants from start-up firms, to dissolve any future inconveniences that may arise when the company gets publicized or acquired by someone.
Was Tech The Reason Why SVB Collapsed?
Could be Tech itself is a community where tech business owners are connected in a chain. When one founder yields benefits from SVB, they tell the next one and the information gets passed on very quickly.
“Interconnectedness” has played a major role in ruining SVB, said Charlie O’Donnell, Brooklyn Bridge Ventures partner.
Since banks like SVBs are often linked to a single business model, it obviously becomes complicated in the long run. But the issue not only concerned the tech companies but also other venture capitalists who were hurrying to withdraw their hard-earned money from SVBs.
O’Donnell revealed that even he had advised his portfolio companies to take their money out, whereas, most of the 60 companies in his portfolio had pulled their funds before the bank was shut on Friday.
But when considering the tech companies, nobody can blame them for panicking in such situations, as they are already at their weakest after the recent crypto crash.
The other related theory floating in the tech world is many of the tech founders fail to maintain a long-lasting relationship with the bank. If only they were a bit more supportive at these crucial times, SVB might have survived.
Will SVB Adversely Affect Tech Companies?
Although the internet is going frenzy over the SVB crisis from a broader perspective, the major concern is still how the techies will recover themselves from the issue. Unfortunately, a definite answer is yet to be found as techies are still baffled thinking about how they are going to manage the situation.
Even though the FDIS has promised to guarantee deposits of up to $250,000, that money won’t run for a long time. But it’s certainly a relief that a minimum of $250,000 would be paid back to the SVB clients, who qualify the eligibility criteria.
Since FDIS has not specifically mentioned the companies that deposited their amount in form of cash, while announcing the repayment, it is probable that the repayment is applicable to companies that used other SVB instruments like credit cards and revolver loans.
But what is more terrifying is that you could still be affected by the SVB crisis even if you are not directly connected to it. For instance, if you are running a start-up business and your vendor, who is using SVB services, fails to provide you properly, you might end up in trouble.
Although SVB is taken over by the FDIC, some of the SVB clients might have to go through a few near-time hiccups, which could be distressing.
Will SVB Investors Get Their $250,000 Back?
The Federal Deposit Insurance Corporation was formed to protect customers of American banks in the wake of the Great Depression. During that time, several member banks collapsed, leading the American banking system to be unstable.
But ever since FDIC was created, customers were relieved as they function as the backup system to their member banks.
So, when a member bank collapses, the responsibility to pay back to its consumers, specifically up to $250,000, is taken over by the federal institution. But the amount exceeding the limit would not be paid back.
In short, the FDIC is created with the sole intention to repay the deposit of its member banks, which provide their income. Including SVB, most of the US-based banks are FDIC- insured.
According to the claim made by FDIC, each of the SVB customers will get their money back up to $250k, if their investment comes under the limit. Until now, there is no guarantee for the repayment of the remaining amount. But, customers will be provided with an advanced dividend on behalf of it later this week.
The FDIC is currently looking through the bank’s data and checking which are the customers who have made investments of more than $250,000 and by how much they exceed.
Although things are appearing quite terrifying at the moment, there is a fat chance that FDIC will let go of your uninsured amount in your SVB bank account.
Many SVB customers are in hopes that SVB will be sold to a potential buyer, who will take care of the remaining complexities in an efficient manner. Although it sounds optimistic and easy, buying a collapsed bank with debts of hundreds of millions is not a cinch.