The sudden collapse of Silicon Valley Bank has thousands of tech startups wondering what happens now to their millions of dollars in deposits, money market investments, and outstanding loans.
Most importantly, they’re trying to figure out how to pay their employees.
“The number one question is, ‘How do you make payroll in the next couple days,’” said Ryan Gilbert, founder of venture firm Launchpad Capital. “No one has the answer.”
SVB, a 40-year-old bank that’s known for handling deposits and loans for thousands of tech startups in Silicon Valley and beyond, fell apart this week and was shut down by regulators in the largest bank failure since the financial crisis. The demise began late Wednesday when SVB said it was selling $21 billion of securities at a loss and trying to raise money. It turned into an all-out panic by late Thursday, with the stock down 60% and tech executives racing to pull their funds.
While bank failures aren’t entirely uncommon, SVB is a unique beast. It was the 16th biggest bank by assets at the end of 2022, according to the Federal Reserve, with $209 billion in assets and over $175 billion in deposits.
However, unlike a typical brick-and-mortar bank — Chase, Bank of America, or Wells Fargo — SVB is designed to serve businesses, with over half its loans to venture funds and private equity firms and 9% to early and growth-stage companies. Clients that turn to SVB for loans also tend to store their deposits with the bank.
The Federal Deposit Insurance Corporation, which became the receiver of SVB, insures $250,000 of deposits per client. Because SVB serves mostly businesses, those limits don’t mean much. As of December, roughly 95% of SVB’s deposits were uninsured, according to filings with the SEC.
The FDIC said in a press release that insured depositors will have access to their money by Monday morning.
But the process is much more convoluted for uninsured depositors. They’ll receive a dividend within a week covering an undetermined amount of their money and a “receivership certificate for the remaining amount of their uninsured funds.”
“As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors,” the regulator said. Typically, the FDIC would put the assets and liabilities in the hands of another bank, but in this case, it created a separate institution, the Deposit Insurance National Bank of Santa Clara (DINB), to take care of insured deposits.
Clients with uninsured funds — anything over $250,000 — don’t know what to do. Gilbert said he’s advising portfolio companies individually, instead of sending out a mass email, because every situation is different. He said the universal concern is meeting payroll for March 15.
Gilbert is also a limited partner in over 50 venture funds. On Thursday, he received several messages from firms regarding capital calls, or the money that investors in the funds send in as transactions take place.
“I got emails saying don’t send money to SVB, and if you have let us know,” Gilbert said.
The concerns regarding payroll are more complex than just getting access to frozen funds because many of those services are handled by third parties that were working with SVB.
Rippling, a back office-focused startup handles payroll services for many tech companies. On Friday morning, the company sent a note to clients telling them that, because of the SVB news, it was moving “key elements of our payments infrastructure” to JPMorgan Chase.
“You need to inform your bank immediately about an important change to the way Rippling debits your account,” the memo said. “If you do not make this update, your payments, including payroll, will fail.”
Rippling CEO Parker Conrad said in a series of tweets on Friday that some payments are getting delayed amid the FDIC process.
“Our top priority is to get our customers’ employees paid as soon as we possibly can, and we’re working diligently toward that on all available channels, and trying to learn what the FDIC takeover means for today’s payments,” Conrad wrote.
One founder, who asked to remain anonymous, told CNBC that everyone is scrambling. He said he’s spoken with more than 30 other founders, and talked to a finance chief from a billion-dollar startup who has tried to move more than $45 million out of SVB to no avail. Another company with 250 employees told him that SVB has “all our cash.”
An SVB spokesperson pointed CNBC back to the FDIC’s statement when asked for comment.
‘Significant contagion risk’
For the FDIC, the immediate goal is to quell fears of systemic risk to the banking system, said Mark Wiliams, who teaches finance at Boston University. Williams is quite familiar with the topic as well as the history of SVB. He used to work as a bank regulator in San Francisco.
Williams said the FDIC has always tried to work swiftly and to make depositors whole, even if when the money is uninsured. And according to SVB’s audited financials, the bank has the cash available — its assets are greater than its liabilities — so there’s no apparent reason why clients shouldn’t be able to retrieve the bulk of their funds, he said.
“Bank regulators understand not moving quickly to make SVB’s uninsured depositors whole would unleash significant contagion risk to the broader banking system,” Williams said.
Treasury Secretary Janet Yellen on Friday met with leaders from the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency regarding the SVB meltdown. The Treasury Department said in a readout that Yellen “expressed full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient and regulators have effective tools to address this type of event.”
On the ground in Silicon Valley, the process has been far from smooth. Some execs told CNBC that, by sending in their wire transfer early on Thursday, they were able to successfully move their money. Others who took action later in the day are still waiting — in some cases, for millions of dollars — and are uncertain if they’ll be able to meet their near-term obligations.
Regardless of if and how quickly they’re able to get back up and running, companies are going to change how they think about their banking partners, said Matt Brezina, a partner at Ford Street Ventures and investor in startup bank Mercury.
Brezina said that after payroll, the biggest issue his companies face is accessing their debt facilities, particularly for those in financial technology and labor marketplaces.
“Companies are going to end up diversifying their bank accounts much more coming out of this,” Brezina said. “This is causing a lot of pain and headaches for lots of founders right now. And it’s going to hit their employees and customers too.”
SVB’s rapid failure could also serve as a wakeup call to regulators when it comes to dealing with banks that are heavily concentrated in a particular industry, Williams said. He said that SVB has always been overexposed to tech even though it managed to survive the dot-com crash and financial crisis.
In its mid-quarter update, which began the downward spiral on Wednesday, SVB said it was selling securities at a loss and raising capital because startup clients were continuing to burn cash at a rapid clip despite the ongoing slump in fundraising. That meant SVB was struggling to maintain the necessary level of deposits.
Rather than sticking with SVB, startups saw the news as troublesome and decided to rush for the exits, a swarm that gained strength as VCs instructed portfolio companies to get their money out. Williams said SVB’s risk profile was always a concern.
“It’s a concentrated bet on an industry that it’s going to do well,” Williams said. “The liquidity event would not have occurred if they weren’t so concentrated in their deposit base.”
SVB was started in 1983 and, according to its written history, was conceived by co-founders Bill Biggerstaff and Robert Medearis over a poker game. Williams said that story is now more appropriate than ever.
“It started as the result of a poker game,” Williams said. “And that’s kind of how it ended.”
One of the most prominent lenders in the world of technology start-ups, struggling under the weight of ill-fated decisions and panicked customers, collapsed on Friday, forcing the federal government to step in.
The Federal Deposit Insurance Corporation said on Friday that it would take over Silicon Valley Bank, a 40-year-old institution based in Santa Clara, Calif. The bank’s failure is the second-largest in U.S. history and the largest since the financial crisis of 2008.
The move put nearly $175 billion in customer deposits under the regulator’s control. While the swift downfall of the nation’s 16th largest bank evoked memories of the global financial panic of a decade and a half ago, it did not immediately touch off fears of widespread destruction in the financial industry or the global economy.
Silicon Valley Bank’s failure came two days after its emergency moves to handle withdrawal requests and a precipitous decline in the value of its investment holdings shocked Wall Street and depositors, sending its stock careening. The bank, which had $209 billion in assets at the end of 2022, had been working with financial advisers until Friday morning to find a buyer, a person with knowledge of the negotiations said.
While the woes facing Silicon Valley Bank are unique to it, a financial contagion appeared to spread through parts of the banking sector, prompting Treasury Secretary Janet Yellen to publicly reassure investors that the banking system was resilient.
Investors dumped stocks of peers of Silicon Valley Bank, including First Republic, Signature Bank and Western Alliance, many of which cater to start-up clients and have similar investment portfolios.
Trading in shares of at least five banks was halted repeatedly throughout the day as their steep declines triggered stock exchange volatility limits.
By comparison, some of the nation’s largest banks appeared more insulated from the fallout. After a slump on Thursday, shares of JPMorgan, Wells Fargo, and Citigroup were generally flat on Friday.
That’s because the biggest banks operating in a vastly different world. Their capital requirements are more stringent and they also have far broader deposit bases than banks like Silicon Valley, which do not attract masses of retail customers. Regulators have also tried to keep the big banks from focusing too heavily in a single area of business, and they have largely stayed away from riskier assets like cryptocurrencies.
“I don’t think that this is an issue for the big banks — that’s the good news, they’re diversified,” said Sheila Bair, former chair of the F.D.I.C. Ms. Bair added that since the largest banks were required to hold cash equivalents even against the safest forms of government debt, they should be expected to have plenty of liquidity.
On Friday, Ms. Yellen discussed the issues surrounding Silicon Valley Bank with banking regulators, according to a statement from the Treasury Department.
Representatives from the Federal Reserve and the F.D.I.C. also held a bipartisan briefing for members of Congress organized by Maxine Waters, a Democrat from California and the ranking member of the House Financial Services Committee, according to a person familiar with the matter.
Silicon Valley Bank’s downward spiral accelerated with incredible speed this week, but its troubles have been brewing for more than a year. Founded in 1983, the bank had long been a go-to lender for start-ups and their executives.
Though the bank advertised itself as a “partner for the innovation economy,” some decidedly old-fashioned decisions led to this moment.
Flush with cash from high-flying start-ups that had raised a lot of money from venture capitalists, Silicon Valley Bank did what all banks do: It kept a fraction of the deposits on hand and invested the rest with the hope of earning a return. In particular, the bank put a large share of customer deposits into long-dated Treasury bonds and mortgage bonds which promised modest, steady returns when interest rates were low.
That had worked well for years. The bank’s deposits doubled to $102 billion at the end of 2020 from $49 billion in 2018. One year later, in 2021, it had $189.2 billion in its coffers as start-ups and technology companies enjoyed heady profits during the pandemic.
But it bought huge amounts of bonds just before the Federal Reserve began to raise interest rates a little more than a year ago, then failed to make provisions for the possibility that interest rates would rise very quickly. As rates rose, those holdings became less attractive because newer government bonds paid more interest.
That might not have mattered so long as the bank’s clients didn’t ask for their money back. But because the gusher of start-up funding slowed at the same time as interest rates were rising, the bank’s clients began to withdraw more of their money.
To pay those redemption requests, Silicon Valley Bank sold off some of its investments. In its surprise disclosure on Wednesday, the bank admitted that it had lost nearly $2 billion when it was all but forced to sell some of its holdings.
“It’s the classic Jimmy Stewart problem,” said Ms. Bair, referring to the actor who played a banker trying to stave off a bank run in the film “It’s a Wonderful Life.” “If everybody starts withdrawing money all at once, the bank has to start selling some of its assets to give money back to depositors.”
Those fears set off investor worries about some of the regional banks. Like Silicon Valley Bank, Signature Bank is also a lender that caters to the start-up community. It’s perhaps best known for its connections to former President Donald J. Trump and his family.
First Republic Bank, a San Francisco-based lender focused on wealth management and private banking services for high net worth clients in the tech industry, warned recently that its ability to earn profits is being hampered by rising interest rates. Its Phoenix-based peer in the wealth management industry, Western Alliance Bank, is facing similar pressures.
Separately, another bank, Silvergate, said on Wednesday that it was shutting down its operations and liquidating after suffering heavy losses from its exposure to the cryptocurrency industry.
A First Republic spokesman responded to a request for comment by sharing a filing the bank made to the Securities and Exchange Commission on Friday stating that its deposit base was “strong and very well diversified” and that its “liquidity position remains very strong.”
A Western Alliance spokeswoman pointed to a news release by the bank on Friday describing the condition of its balance sheet. “Deposits remain strong,” the statement said. “Asset quality remains excellent.”
Representatives of Signature and Silicon Valley Bank had no comment. Representatives for the Federal Reserve and F.D.I.C. declined to comment.
Some banking experts on Friday pointed out that a bank as large as Silicon Valley Bank might have managed its interest rate risks better had parts of the Dodd-Frank financial-regulatory package, put in place after the 2008 crisis, not been rolled back under President Trump.
In 2018, Mr. Trump signed a bill that lessened regulatory scrutiny for many regional banks. Silicon Valley Bank’s chief executive, Greg Becker, was a strong supporter of the change, which reduced how frequently banks with assets between $100 billion and $250 billion had to submit to stress tests by the Fed.
Mr. Becker, who had been on the San Francisco Fed’s board of directors, was no longer on the board as of Friday, a Fed spokesperson said.
At the end of 2016, Silicon Valley Bank’s asset size was $45 billion. It had jumped to more than $115 billion by the end of 2020.
Friday’s upheaval raised uncomfortable parallels to the 2008 financial crisis. Although it’s not uncommon for small banks to fail, the last time a bank of this magnitude unraveled was in 2008, when the F.D.I.C. took over Washington Mutual.
The F.D.I.C. rarely takes over banks when the markets are open, preferring to put a failing institution into receivership on a Friday after the business has closed for the weekend. But the banking regulator put out a news release in the first few hours of trading on Friday, saying that it created a new bank, the National Bank of Santa Clara, to hold the deposits and other assets of the failed one.
The regulator said that the new entity would be operating by Monday and that checks issued by the old bank would continue to clear. While customers with deposits of up to $250,000 — the maximum covered by F.D.I.C. insurance — will be made whole, there’s no guarantee that depositors with larger amounts in their accounts will get all of their money back.
Those customers will be given certificates for their uninsured funds, meaning they would be among the first in line to be paid back with funds recovered while the F.D.I.C. holds Silicon Valley Bank in receivership — although they might not get all of their money back.
When the California bank IndyMac failed in July 2008, it, like Silicon Valley Bank, did not have an immediate buyer. The F.D.I.C. held IndyMac in receivership until March 2009, and large depositors eventually only received 50 percent of their uninsured funds back. When Washington Mutual was bought by JPMorgan Chase, account holders were made whole.
Silicon Valley Bank on Friday became the biggest American bank to fail since the collapse of Washington Mutual in 2008, at the height of the global financial crisis.
The implosion of Washington Mutual, as well as the investment banks Lehman Brothers and Bear Stearns, was followed by a systemwide failure. From 2008 to 2015, more than 500 federally insured banks failed.
Most were small or midsize regional banks and were absorbed into other institutions, a common outcome for banks that have been put under government control. Washington Mutual, which was heavily involved in risky mortgages and became the largest bank to fail in U.S. history, was sold to JPMorgan Chase.
In recent years, fewer banks have gone under, thanks in part to stricter regulations that were put in place in the wake of the financial crisis. Before Silicon Valley Bank, the last firm to fail was in late 2020, as the coronavirus was ravaging the country.
It’s unclear whether the collapse of Silicon Valley Bank will spread to the broader industry. The bank was best known for its lending to technology and healthcare start-ups, and it had $209 billion in assets at the end of last year — making it the nation’s 16th-largest bank. But that is still small in comparison with the top three, which hold more than a trillion each and have much more diversified business models and customer bases.
JPMorgan Chase
1.
$3.20
trillion
Bank of America
2.
2.42
Citibank
3.
1.77
Wells Fargo
4.
1.72
U.S. Bank
5.
$585
billion
PNC Bank
6.
552
Truist Bank
7.
546
Biggest U.S.
banks by
total assets
Goldman Sachs
8.
487
Capital One
9.
453
TD Bank
10.
387
Bank of New York Mellon
11.
325
State Street Bank and Trust
12.
298
Citizens Bank
13.
226
First Republic Bank
14.
213
Morgan Stanley Private Bank
15.
210
16.
Silicon Valley Bank
209
Fifth Third Bank
17.
206
Morgan Stanley Bank
18.
201
M&T Bank
19.
200
KeyBank
20.
188
The regulation that was put in place for the nation’s biggest banks after the financial crisis includes stringent capital requirements, which means they must have a certain amount of reserves for moments of crisis, as well as stipulations about how diversified their businesses must be.
But Silicon Valley Bank and others its size do not have the same regulatory oversight. In 2018, President Donald J. Trump signed a bill that lessened scrutiny for many regional banks. Silicon Valley Bank’s chief executive, Greg Becker, was a strong supporter of the move. Among other things, it changed requirements for the amount of cash that these banks had to keep on their balance sheets to protect against shocks.
On Friday, as the trading of Silicon Valley Bank’s stock was halted and the federal government began taking over its business, several other mid-sized institutions began to feel the weight of the collapse.
Shares of the First Republic and Signature banks tumbled on Friday, with Signature down nearly 23 percent at the end of trading. The S&P 500 fell 1.4 percent on Friday, ending the week down 4.5 percent — its worst weekly performance of the year.
Some of the nation’s largest Wall Street firms, however, including JPMorgan, Wells Fargo, and Citigroup, saw their shares nudge higher.
After Friday’s stunning collapse of Silicon Valley Bank, questions swirled around the exposure of one of crypto’s top firms, Circle, the issuer of the second-largest stablecoin, USDC.
In its March attestation, Circle had revealed that part of its $9.88 billion in cash reserves was held at SVB, although it did not disclose the total amount. Following the collapse of SVB, withdrawals from USDC mounted, with the crypto intelligence platform Nansen showing over $1 billion in redemptions from the stablecoin since SVB’s shutdown. USDC has a market cap just north of $40 billion.
As USDC lost its $1 peg across different crypto exchanges amid withdrawals, Circle sought to instill confidence, with the company tweeting at 6:50 pm ET that it would continue to operate normally, sharing that SVB was one of the six banking partners it uses for the 25% of its reserves that it keeps in cash, although still not disclosing the amount held at SVB.
As investors continued to move out of USDC, Binance announced it would be temporarily suspending its auto-conversion policy of USDC to its BUSD stablecoin, citing “market conditions” and describing the action as a “normal risk-management procedural step.”
At 10:11 PM ET, Circle offered more clarity, tweeting that $3.3 billion—or around 8%—of its reserves remained at SVB, revealing that wires initiated on Thursday to remove balances from the bank had not been processed.
Dante Disparte, Circle’s chief strategy officer, tweeted soon after that Circle was protecting USDC “from a black swan failure in the banking system.”
Meanwhile, USDC’s peg continued to weaken, with the token trading at $0.92 against tether on Kraken as of 10:40 pm ET. Coinbase announced it would be temporarily pausing conversions from USDC to USD over the weekend while banks are closed, adding that during periods of heightened activity, conversions rely on USD transfers from banks that clear during normal banking hours. Coinbase worked with Circle to create USDC, launching the token in 2018.
After the FDIC placed SVB into receivership on Friday, the weekend will prove an uncertain time as the financial world waits to see if the U.S. government is able to find a buyer for the failed bank or will otherwise backstop losses, with insured deposits only backed up to $250,000. Former Treasury Secretary Lawrence Summers called for depositors to be paid back in full.
While the crypto industry seems to be safe from SVB contagion for now, with much of the sector moving to Signature Bank and other partners in the wake of Wednesday’s voluntary liquidation of Silvergate, Circle could prove the exception. The firm is a fundamental cog in the crypto ecosystem, with USDC serving as a crucial on-ramp into crypto for investors globally.
Some onlookers expressed confidence that Circle would be able to weather the storm. The investor Adam Cochran tweeted that Circle could cover a possible $3.3 billion gap from the interest it collects from reserves, a sale share, or other venture debt.
“This is a non-issue in my mind,” he wrote.
Former US Treasury Secretary Lawrence Summers says he doesn't expect SVB Financial Group's meltdown to pose a "systemic risk" to the financial system https://t.co/VE7kEFU5wx pic.twitter.com/A6mNs5nm5Y
— Bloomberg (@business) March 11, 2023
California banking regulators closed SVB Financial Group, putting the tech-heavy lender into receivership in the largest bank failure since the 2008 financial crisis https://t.co/KzipDZtHBS pic.twitter.com/pPpXVMO3dH
— Reuters Business (@ReutersBiz) March 11, 2023
Tucker Carlson on the Silicon Valley Bank collapse:
— Citizen Free Press (@CitizenFreePres) March 11, 2023
"When customers showed up at SVB's branch in Manhattan today to get their deposits back, managers called the police. What we have here is a 1929-style bank run. And that's not a good sign for anyone." pic.twitter.com/KY3KEeoYzC