On Wednesday, Silicon Valley Bank there are well-capitalized institutions seeking to raise some funds.
Within 48 hours, the panic caused by the venture capital community that SVB served and trained ended the bank’s 40 years.
Regulators closed SVB on Friday and seized deposits in the biggest US banking failure since the 2008 financial crisis and the second largest. The company’s downward spiral began late Wednesday, when it surprised investors with news that it would need to raise $2.25 billion to shore up its balance sheet. What followed was the rapid collapse of a venerable bank that had thrived alongside its technology clientele.
Even now, as the dust begins to settle on the second wind-down bank announced this week, members of the VC community are lamenting the role that other investors played in SVB’s demise.
“This is a bank driven by VC-induced hysteria,” Ryan Falvey, fintech investor at Restive Ventures, told CNBC. “This will go down as one of the leading cases of the industry cutting its nose to avoid being seen.”
A Brinks armored truck is parked in front of the closed headquarters of Silicon Valley Bank (SVB) on March 10, 2023 in Santa Clara, California.
Justin Sullivan | Getty Images
The episode is the latest fallout from the Federal Reserve’s move to curb inflation with its most aggressive rate hike campaign in four decades. The consequences could be far-reaching, with concerns that startups may not be able to pay their employees in the coming days, venture investors may struggle to raise funds, and an already battered sector could suffer deeper pain.
Shares of Silicon Valley Bank fell this week.
The root of SVB collapse comes from dislocations caused by higher levels. As startup clients withdrew deposits to keep their companies in a cold environment for IPOs and private fundraising, SVB found itself short of capital. It has been forced to sell all bonds available for sale at a loss of $1.8 billion, the bank said on Wednesday.
The sudden need for fresh capital, coming on the heels of the collapse of the crypto-focused Silvergate bank, triggered another wave of deposit withdrawals as VCs instructed portfolio companies to transfer funds, according to people with knowledge of the matter. Concern: open banks in SVB could pose an existential threat to startups that cannot tap into deposits.
SVB customers said CEO Greg Becker didn’t inspire confidence when he asked them to “keep calm” during a call that began Thursday afternoon. The fall in stocks continued indefinitely, reaching 60% at the end of regular trading. Importantly, Becker can not assure listeners that raising capital will be the end of the bank, said the person on the phone.
The death blow
All told, customers withdrew $42 billion in deposits by the end of Thursday, according to a California regulatory filing.
At the end of the business day, SVB had a negative cash balance of $958 million, according to the filing, and failed to scrounge sufficient collateral from other sources, the regulator said.
Falvey, a former SVB employee who launched his own fund in 2018, points to the interconnected nature of the tech investment community as the main reason for the bank’s sudden demise.
Prominent funds including Union Square Ventures and Coatue Management blasted an email to all the startups listed in the last few days, instructing them to pull funding from SVB over concerns about the bank’s operations. Social media only adds to the panic, he said.
“If you say, ‘Hey, your deposit, this is going to fail,’ it’s like yelling fire in a crowded theater,” Falvey said. “That’s a self-fulfilling prophecy.”
Another venture investor, TSVC partner Spencer Greene, also criticized the investor for “getting the facts wrong” about SVB’s position.
“It seemed to me that there was no liquidity problem until some VC called it,” Greene said. “He was not responsible, then he became independent.”
‘Business as usual’
On Thursday afternoon, some SVB customers received an email assuring them that it was “business as usual” at the bank.
“I’m sure you’ve heard some buzz about SVB in the market today so wanted to reach out to provide some context,” one SVB banker wrote to a client, according to a copy of the message obtained by CNBC.
“It’s business as usual at SVB,” the banker wrote. “Of course there may be questions and I want to make myself available if you have any problems.”
On Friday, as SVB’s stock continued to fall, the bank called off efforts to sell shares, CNBC’s David Faber reported. However, they are looking for a buyer, reports said. But the flight of deposits made the sale process more difficult, and those efforts also failed, Faber said.
Customers stand outside the closed headquarters of Silicon Valley Bank (SVB) on March 10, 2023 in Santa Clara, California.
Justin Sullivan | Getty Images
Falvey, who began his career in Wells Fargo and asked for the bank that was arrested during the financial crisis, saying that the mid-term update analysis of SVB from Wednesday gives confidence. The bank is well capitalized and can make all depositors whole, he said. He even advised his portfolio companies to keep their funds in SVB when rumors spread.
Now, thanks to the bank run that ended in the foreclosure of SVB, those who stayed with SVB face an uncertain timeline for getting their money. While insured deposits are expected to be available as early as there is, the lion’s share of deposits held by SVB were uninsured, and it is not clear when they will be released.
“Rapid withdrawals of deposits result in Banks being unable to pay their obligations when they are due,” California’s financial regulator said. “The bank is now bankrupt.”
