SIcon Valley Bank (SVB) became one of the 20 largest banks in the US for being the darling of West Coast tech startups, but it turns out that it expanded at the expense of managing its risk exposure.
The bank provided services to more than 2,500 venture capital (VC) firms, companies that invest in startups hoping they will achieve long-term growth, and nearly half of VC-backed life sciences and technology companies US risk
Venture capitalists and startups were allowed to keep multi-million dollar balances in the bank when the federal government only insures $250,000 per account. The bank had done virtually nothing to protect itself against rising interest rates (even when the whole world anticipated them), and it had successfully lobbied Congress for deregulation, reducing its regulatory oversight.
As interest rates rose, businesses became more expensive to invest and run, and customers began withdrawing cash. SVB started looking for ways to cover these withdrawals, sold part of its bond portfolio at a loss, and then couldn’t find a buyer.
Its collapse came in the same week that Signature and Silvergate banks failed, raising concerns it would lead to a broader run on banks. There were also concerns that viable businesses would be affected. Early-stage startups often earn virtually no income, but use investors’ money, held in their bank accounts, to finance their operations. Beyond the US shores, the UK subsidiary of SVB had billions in deposits, again focused on the technology sector. Inevitably, calls would come in for someone to step in and do something.
In the UK, HSBC bought SVB UK. HSBC has a strong enough balance sheet to assure everyone that it can absorb SVB and, as a result of the purchase, has insured the deposits of more than 3,000 customers, worth £6.7 billion. In the US, the Federal Reserve promised that depositors would have full access to their money. This exception to the normal rules was evidence that the US central bank feared that the crisis would spread. The Fed signaled, along with US President Joe Biden, that this would not be funded by taxpayers. Any shortfall will be drawn from the Deposit Guarantee Fund, which comes from fees paid by the banking industry. Whether these fees are passed on to customers remains to be seen.
This isn’t a repeat of 2008, but we’re seeing the same basic principles play out. The government and central banks have stepped in to support financial institutions and the customers that depend on them. What is different this time is that unlike the banks, which have long been aware of their relationship with the state, the tech sector believed it was above it. From key libertarian figures like Peter Thiel to the “Silicon Six” shifting revenue to low-tax jurisdictions, big tech has rarely supported the state.
But as we see with SVB, the tech sector needs the support of the state when times get tough. Banks that specialize in technology investments are still connected to the broader banking system. Venture capitalists and tech companies who trusted their deposits to be safe also trust the same system as the rest of us. More generally, the sector must stop seeing itself as exceptional and realize that it is connected to and has a duty to society. Because next time, you may find that what’s left of government and regulators are unwilling, or simply unable, to help.
