Tech Startups Scramble After Silicon Valley Bank Collapse, Bank-to-Bank Bailout
By Laura Cowan
Laura K. Cowan is a tech editor and journalist whose work has focused on promoting sustainability initiatives for automotive, green tech, and conscious living media outlets.
The Silicon Valley Bank website has been taken over by "Silicon Valley Bridge Bank" to create a vehicle to serve existing SVB depositors via the FDIC receivership of the failed bank.
In an attempt to quell a banking panic that has so far mainly affected tech startups banking with Silicon Valley Bank and Signature Bank and now First Republic, the Fed is now insisting that treasury bonds will be guaranteed to be worth what they were issued for and that the Federal Reserve would guarantee bank deposits to keep banks afloat after federal interest rate hikes and over-investment in assets that have dropped in value since peaking during a hot housing and crypto market in 2021 seem to have tipped several banks into insolvency.
This crisis started at Silicon Valley Bank, a major investor in tech startups and companies in California, due to drops in mortgage asset values. After losing money selling off these assets, SVB failed to raise funds to cover debts, and were taken over by the FDIC, who promised that insured deposits would be available to bank clients to prevent a bank run. This was only partially successful, as many depositors at SVB had far more than the insured $250,000 invested with the bank, and other banks soon followed with solvency problems. Signature Bank followed in a downward slide of share values, in what quickly became the second and third largest bank failures in U.S. History after Washington Mutual's failure in 2008: Depositors spooked by SVB's collapse withdrew their assets from Signature. This started a cascade with other banks with risky assets requiring a quick bailout to remain solvent.
The Federal Reserve Acts To Prevent a Banking Meltdown
On Thursday, March 16, the following statement was released by Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg:
"Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.
"After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.
"We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.
"Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
"Finally, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.
"The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry. Those reforms combined with today's actions demonstrate our commitment to take the necessary steps to ensure that depositors' savings remain safe."
The Federal Reserve has taken extraordinary action to shore up bank solvency by creating a funding program for banks.
Tech Startups Hit By Banking Crisis
Will that be enough to prevent a cascading failure of banks with more exposed assets? Unlike the last banking crisis in the United States, this time fellow banks like JP Morgan are offering bailouts to struggling banks that have lower percentage of insured deposits or capital to cover their assets. Silicon Valley Bank invested heavily in new companies in the tech sector and in housing, which means that during a sudden bank run, they did not have the capital to cover their investments. Other banks with more conservative portfolios are stepping forward in conjunction with government action to stabilize the system for banks like SVB.
It remains to be seen if this can continue without spillover to other banks being affected. Tech investment in startups is already down 37% year over year since a peak last year, so SVB's collapse has sent many investors and startups scrambling to figure out their exposure and solvency, as well as their options for raising more capital in a market suddenly hesitant to invest. After a year of big tech layoffs to balance the books following overhiring during the COVID-19 pandemic tech hiring spree due to remote work and online shopping booms, the tech industry is now rushing to rework the balance sheet and protect against insolvency in a recession. First Republic's stock was halted for trading temporarily this week, then closed 30% lower despite billions being contributed by multiple banks to shore up the institution.
A New Lending Option for Banks from the Federal Reserve
California regulators closed down Silicon Valley Bank on Friday, putting it under control of the U.S. Federal Deposit Insurance Corporation. The FDIC is acting as receiver to manage and likely liquidate the bank’s assets to pay back customers, ranging from depositors to creditors. The collapse was hastened by a social media-fueled panic on Twitter, in which startups withdrew funds in rapid succession to protect against uninsured assets being lost. This sparked broader concern about a financial industry collapse, though that is likely overblown.
To help shore up confidence and solvency of tech companies and their banks, the Federal Reserve has created a program to lend cash to institutions, to the tune of $12 billion to banks just this week. The new Bank Term Lending Program was created to prevent other banks from failing. The new lending program allows banks to borrow money for up to a year in exchange for treasury bonds that lost value during the Fed's rate hikes. This program will allow banks to avoid selling assets like these bonds at a loss like Silicon Valley Bank was forced to do, sparking the bank run.
In an economy that has begun to falter due to rate hikes and a peaked housing market that is still short on units during a cost of living crisis, it's unclear whether the U.S. government can afford to shore up banks and companies enough to prevent investors from sustaining losses. It is likely that due to a continued strong job market (for the moment, anyway), the Fed will continue a more modest rate hike attempt to cool inflation to balance out the economy. But so far, this is only resulting in $600 billion of unrealized losses from Treasury debt, according to the FDIC. While the Fed is attempting to negate that debt, it has to go somewhere.
These are large numbers, but the $12 billion borrowed from this new federal lending institution is not much compared to the bank borrowing that has occurred over the past week through more traditional means, which totals $152.8 billion lent to banks.
What's Next For Startups Looking for Cash?
VC and former tech journalist Jason Calacanis invited criticism by spreading concern to 700,000 followers last week on his popular podcast on tech startups, which some people say helped to stoke fears and provoked the SVB bank run. But it's hardly in one person's corner: Twitter was awash in panic, which wasn't unjustified for startups that had millions invested in a bank that only could guarantee $250,000 deposits through the FDIC.
So what are tech startups to do in a market that has backed off investing in 2023 to wait out economic uncertainty and now is facing a banking system crisis? Many leaders in the tech community are advising investors to help with cash for their startups where that is feasible, but that may not be possible when VCs also banked with SVB or other banks that have since failed and needed bailouts, including Credit Suisse or First Republic.
It was inevitable that a hot startup investing market would have to cool at some point, especially as it went hand in hand with a cost of living crisis that rocketed inflation to historic levels. The U.S. government is serious about preventing widespread impact, and it's possible this will require the Federal Reserve to back off plans to squash inflation by further raising interest rates while the economy is at risk of faltering. Mortgage rates are slightly down meantime, as investors and employers as well as employees hold their breath hoping that their companies can make payroll and that the damage will stop here. If you run a startup that is in need of funding, the Federal Reserve might have other programs that can help. Several lending programs were put in place during the pandemic to support financial stability for companies across the U.S. through federal business lending programs.
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