“I attended its anniversaries over the years and they were looking forward to celebrating their 40th anniversary this year. Yet, they shut down in a span of 14 hours,” said Vish Mishra, a veteran venture capitalist, on the sudden collapse of Silicon Valley Bank (SVB) on March 10.
SVB had assets worth about $209 billion and was the second-largest bank failure in US history after Washington Mutual collapsed in 2008. Just 18 months ago, SVB was valued at more than $44 billion. The Federal Deposit Insurance Corporation (FDIC), the US regulator that guarantees bank deposits of up to $250,000, said it was closing SVB and that insured depositors would have access to their funds by Monday, March 13.
But one skeptical account holder, who did not want to be named for this story, said, “We are dealing with a major crisis at this time. We bank with SVB. It is going to take up to next Wednesday or Thursday before things become clear.”
However, to protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB). At the time of closing, the FDIC as receiver immediately transferred to the DINB all insured deposits of Silicon Valley Bank.
“All insured depositors will have full access to their insured deposits on Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive 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,” FDIC said in a statement.
Silicon Valley Bank had 17 branches in California and Massachusetts. The main office and all branches of SVB will reopen on Monday, March 13, 2023. The DINB will maintain Silicon Valley Bank’s normal business hours. Banking activities will resume on Monday, March 13, including online banking and other services. Silicon Valley Bank’s official checks will continue to clear.
As of December 31, 2022, SVB had approximately $209 billion in total assets and about $175.4 billion in total deposits. At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.
Customers with accounts in excess of $250,000 have been advised to contact the FDIC toll–free at 1-866-799-0959. The FDIC as receiver will retain all the assets from Silicon Valley Bank for later disposition. Loan customers have been advised to continue to make their payments as usual. SVB is the first FDIC–insured institution to fail this year. The last FDIC–insured institution to close was Almena State Bank, Almena, Kansas, on October 23, 2020.
Mishra who has a long time association with SVB was concerned but calm and hopeful. But shockwaves ran through startups and depositors in Silicon Valley on learning the US regulators shut the bank.
Mishra, spoke to indica about SVB and what its collapse means for startups and depositors. While he assured that there is no need to panic and that the depositors’ money is safe, he acknowledged: “This is a very sad day for a Silicon Valley icon, SVB, that has been the banker for VCs and startups, just like many legal and advisory firms who helped advise VCs and startups! All I can say at this time is that there is plenty of blame to go around. I hope that sanity will prevail and a white knight will soon come to the rescue and assure the safety of $180B in deposits!”
Mishra said that the bank was doing so well it had enough funds. The trouble began in 2021 when the bank invested a significant portion of the funds it had into low-yielding bonds. “But then inflation loomed on the horizon and they were not able to take advantage of the situation. The bank couldn’t withdraw enough money to put into high-rate securities. So, they decided to sell these low-yield bonds, but they suffered a loss of approximately $2 billion. Then they decided to either sell security or borrow some money, and they gave themselves a couple of days to do so because you need to have the cash to take this step. Meanwhile, a lot of people panicked and withdrew their money because they were apprehensive about the bank’s moves. Startups and VCs have their money in the bank. Though the fear among depositors was largely unnecessary as their money was in no danger, there was a panic withdrawal of money, and that put SVB in a liquidity crunch.”
Were the bad decisions to invest in low-yielding bonds and the inability to react to the economic downturn responsible for the bank’s collapse? “I’m pretty sure the bank’s management could have had a bit more foresight, so they could handle this situation, but the borrowers or the depositors also could have shown restraint. They started panicking and started pulling their money. Everybody wanted to pull the money out of the bank. You shouldn’t do that to a bank that you’ve been associated with the bank for 10, 15, or even 20 years. The result of the panic withdrawal was that the bank did not have cash,” Mishra explained.
Whether this collapse will impact most of the startups that have accounts in SVB, Mishra had held out hope and instilled confidence. “Their money is safe. The startups will get their money, even though at this moment they don’t have access to it. FDIC has taken over and it’ll work through the kinks and they’ll ensure that the money is available. In 2008 a similar meltdown had taken place when Washington Mutual collapsed. The FDIC is a government-accredited entity that acts to protect the average consumer.”
Mishra added that in the case of SVB, the people got into panic mode owing to the way in which the bank officials told the account holders about its current status. “I think it just came as a shock because there were no warnings to all the people, that’s why people panicked. So, part of the panic was created by the way the bank communicated. They should have told all the depositors please don’t panic, everything is fine, and your money is safe. They’re not going to steal the money because they’re one of the big banks. I’m very sad because this is an iconic company.
Amidst all the gloom and doom, there’s somebody who’s happy that he doesn’t trust banks. Raju Indukuri, co-founder of FalconX, an Institutional Crypto Trading Platform built for financial institutions, while speaking to indica said: “Everybody in SV might be in shock but I’m happy because I don’t put money in the banks.”
When asked whether he had recommended any of his clients to approach SVB for financial assistance for their project, he said: “Yes, some of them are there, but they have not put in big amounts. If you have put all your money in SVB then it is a problem, but our clients are small startups and they have invested heavily in the bank.”
Indukuri however acknowledged, “It’s a bad situation, especially since good entrepreneurs are going to suffer. As a preferred bank, SVB was a favored destination for many startups and depositors. It is an unfortunate situation. While I feel sad for the entrepreneurs, I also know that they’ll survive. They’ll get funding and this stressful time will pass in the next few weeks or months. This is also nothing new as we passed similar circumstances in 1993, 2000, and 2009.”
Jason Ma,CEO & Chief Mentor, ThreeEQ says, “If I were Citi Corp or Chase or Bank of America I would acquire SVB. If it gets acquired by the big banks the problem would go away. “
“I would consider acquiring them,” Ma said.
Prakash Narayan, Chair of the American Tamil Entrepreneurs Association (ATEA) Silicon Valley said, “ATEA is just as shocked as the rest of the community with the news about SVB. There are a few ATEA startups who bank with SVB. We hope that they are able to recover their assets from the new National Bank of Santa Clara set up by FDIC.”
Some venture capitalists took to social media. Karl Mehta wrote: “The non-stop party culture sponsored by SVB ends. The management and board know many many months before this kind of failure happens. In a data-driven world with all kinds of data for sensitivity and scenario planning, they have to know in advance. There is far more bad things behind the hood which they did not disclosed and let their clients suffer.”