The Failure of Silicon Valley Bank Explained
March 14, 2023
In this special podcast episode, Alan Wink, managing director for EisnerAmper's Capital Markets, examines the collapse of Silicon Valley and Signature banks. He looks at the underlying causes, possible ripple effects, what it means for depositors and the technology ecosystem, possible buyers for the banks and much more.
Absolutely. And we've heard the troubling news about Signature Bank and Silicon Valley Bank, SVB being the largest bank failure since the Great Recession and the second largest bank failure in US history. So we're hearing the increasing interest rates, perhaps along with some of the easing of the Dodd-Frank restrictions in 2018, played a role here. What do you think led to this collapse?
AW:Dave, I really don't want to politicize that. I think a lot of people are pointing to the Trump administration when they eased some of the regulations on smaller banks. I'm not really sure if that had an impact here. It's funny, SVB was a bank that I've known for many, many years in the tech and life sciences space. I've worked with them with several of our clients. It took SVB 40 years to build the reputation they had, which was stellar, and it took 36 hours for it to come tumbling down. It happened really quickly.
And I think if you get to the essence of it, it was sort of a mismanagement of asset and liabilities. What happened with the SVB, during Covid, they gathered a tremendous amount of deposits from technology companies and venture capitalists. In the last three years, their deposit base has grown probably 2 to 2 1/2X. And once again, they had all these deposits, but they couldn't make loans quick enough to use it up. So what does a bank do? They take the deposits they have liabilities on, they invest the capital in making loans, and the rest is invested in safe securities, fixed income.
And what happened with SVB, they were caught in the middle. They took on all these deposits, which are short-term liabilities, and they matched them with long-term assets, long-term fixed income securities that over time, as interest rates went up, and interest rates have been increased seven times in the last year or so, the value of those assets go down. And at the same time, we saw a little bit of a decline in the venture capital space. They hadn't been investing as much money as they had in the past in 2022. And all of a sudden, portfolio companies started to pull their deposits out because they needed the money for working capital reasons, to meet operating expenditures.
And at the same time, SVB had to take money out of these longer term assets and pay back their depositors. And all of a sudden they developed a gap between the amount of money they had and the amount of money they needed. They hired Goldman Sachs very quickly to go out and see if they could raise a secondary offering, attract an investor. The venture capital industry got wind of this. And all of a sudden the VCs and their portfolio companies were instructed to pull the deposit base out of SVB.
And that created the run on the bank that we all saw last week. And it happened really quickly. About $50 billion came out of SVB's accounts literally overnight. And that's when the FDIC stepped in and took over.
DP:It was just a perfect storm.
AW:It was absolutely the perfect storm. And to add to that, one of the interesting things about SVB, and they were the premier venture debt provider. They typically provided debt to companies that had attracted venture capital investors. One of the issues with SVB as a lender is if you took a loan from SVB, if they put debt into your business, they wanted to make sure that all your deposits were in that bank. That's the reason why so many of these depositors had used sums with SVB, and certainly above the $250,000 FDIC threshold.
DP:So SVB depositors really were more than just these smaller seed stage tech companies. I mean, there were some big established companies.
DP:And talk about the ripple effects this could have.
AW:Well, I think you saw it a little bit with Signature Bank being taken over also, and their situation is a little bit different because they had a lot of money invested in crypto assets, and we all know what happened there. You saw First Republic, they halted trading last Thursday also. I think you saw the announcement last night by the Federal Reserve and the Treasury, that the government will backstop all of the depositors' money so that no one has any money at risk. And that's going to be backstopped by sort of a secondary insurance program that the FDIC has with the banks.
So I think a lot of the turmoil was avoided last night as a result of the press release from the Fed and the Treasury. But look, I think the FDIC is taking a closer look at all institutions right now. And let's hope there aren't others out there that have the same mismatched problem that SVB had.
The other part of this is that you're going to see a lot of borrowers transition from SVB and Signature to other banks. I was on the phone literally two hours ago with one of our clients that had money in Signature, and they want to know whether they should pull it out. And we've been fielding calls like that over the last 72 hours.
So you're going to see certainly a transition to other financial institutions. And these financial institutions might not be in the business of venture lending like SVB was. That's not their business.
DP:Now, late last week, Treasury Secretary Yellen said no government bailout. Looks like the Biden administration reversed course a little bit and said that everyone will have access to all of their money. What's the government's plan here, do you think?
AW:Well, I'm going to be honest with you. I expected to see over the weekend the FDIC ensuring that another major money center bank purchased SVB. And I think when you saw the press release that came out late last night, I think the FDIC exhausted those efforts. There was no other bank wanted to step into the shoes of SVB. I don't know the reason why. I was kind of surprised. Something might still might happen, but I think the announcement by the Federal Reserve and the Treasury put people at ease that they can get their money today, and that was really important.
DP:So do you think this is going to be different than 2009 when Washington Mutual, which is still to this day, the largest bank collapse, JP Morgan Chase as you know, bought them out, you don't expect to see a white knight come riding in for this one?
AW:It hasn't happened yet. I'd like to be surprised. I thought someone would come in over the weekend. And I thought it might have been more than one institution, the logical suspects being the large money center banks. Once again, I don't know what's beneath the balance sheet of SVB, but it must be really poorly capitalized for everybody to say no.
DP:What do you think this means for the tech ecosystem?
AW:Well, I think the fact that the government stepped in is a good sign, I think the tech ecosystem was concerned that if all these startups didn't have access to liquidity, they couldn't meet payroll. They certainly can't wait six months to get access to the money. A lot of these tech companies would've went bust. They would've went bankrupt. And I saw a quote over the weekend by a major West Coast VC that said if that happened, this would've set back innovation and technology development in this country 10 years. And you certainly don't want that to happen.
DP:So how should you feel this morning if you are that smaller seed stage tech company? What should be going through your mind?
AW:I think I'm pretty happy that the government stepped in. I think I probably would be considering very seriously moving my money to a more stable financial institution. This shows why a lot of depositors break up their deposits so they're covered by insurance to a higher level in multiple institutions. And we've always advised our clients on that. And I think people are going to be taking a much more critical look at their banking relationships because I don't think anyone would've thought we would've seen another bank failure in our lifetime.
And once again, back to your earlier question, was this something brought about by the Trump administration lowering the regulatory standards? Maybe that had something to do with it, but this goes beyond that. And part of this really is mismanagement within SVB and we still don't know the severity of that, but I think we'll find out pretty soon.
DP:What role do you think the interest rates played?
AW:That's a great question, Dave, and I was actually interviewed by a reporter on Saturday morning about this. And the reporter asked me, do I think that the Fed had this up their sleeve when they increased interest rates so many times? And I think the Fed's idea of raising interest rates was to slow down the economy, not to put the 16th largest bank in the US out of business.
DP:It was unintended consequence perhaps.
AW:Exactly. And I think it was a consequence nobody even thought of. I certainly didn't.
DP:Now I was listening to CNBC this morning, and financial reporter Andrew Ross Sorkin, who is a big time business reporter, talked about the government perhaps revisiting carried interest rates. What do you think? Will this lead to increased regulatory initiatives?
AW:Well, it's funny, I read this morning that as a part of SVB's lending, they were given warrants in numerous companies that they provided debt to. I heard they had warrant interests in about 3,500 companies. I don't know the value of those interests. I'm sure look at the portfolio theory. Some of them have to be worth something and probably a lot of money.
So I think the regulators are certainly going to take a look at that. Carried interest in deals has been part of the VC landscape from day one. That's the part of this that encourages general partners to be in this business. That's the big upside. I don't think that's going to change. VC as an asset class has been uber successful, and has driven innovation in this country that we can't even believe. Without venture capital, the way we went through Covid from a business standpoint would've never happened. The technologies they have bankrolled over the years is amazing.
DP:So let's end out a good note. Give us some words of wisdom for SVB and Signature depositors and the tech ecosystem. What words of wisdom do you have for them? What good could come out of it?
AW:I think number one, I think they're going to come out whole and come out whole very quickly. So I think the alarm bell doesn't have to sign. It doesn't have to ring. I think this is a wake-up call for how venture capitalists and portfolio companies manage their cash. And they need to do it much more prudently in the future. And I think at the end of the day, it was a big wake-up call, and fortunately they didn't suffer as a result of it.
DP:That's a good note to end on. Well, thanks Alan for your expertise and for putting this all into perspective for us.
AW:Dave, thank you as always and we'll talk soon.
DP:And thank you for listening to the EisnerAmper Podcast series. Visit eisneramper.com for more information on on a host of other topics, and join us for our next podcast when we get down to business.
Transcribed by Rev.com