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The fall of Silicon Valley Bank (SVB), the biggest for a US bank since Lehman Brothers in the 2008 financial crisis, exposed thousands of tech startups that may be unable to afford salary payments due to an inability to withdraw funds that they had deposited in the entity.
The provider of salary payments Rippling notified its clients that their processing was halted since SVB acted as an intermediary.
But not only Rippling, a startup, is in difficulties but also a lots of tech companies from Silicon Valley who were SVB customers.
“More than half of the technology companies had the bulk of their money in SVB and they will all have to pay salaries from the beginning of next week,” Greg Martin, founder of the Liquid Stock investment firm, told the Bloomberg agency.
Some CEOs of these small and medium-sized companies in the sector they will resort to their personal savings to pay your employees, while others are considering layoffs, among other options on the table.
The Federal Deposit Insurance Corporation (FDIC)the federal authority that will be the depository of the bank’s funds, will reopen the operations of the SVB on Monday.
The difficulty is that the Government protection covers only insured deposits (that is, those under US$ 250,000) that are a minority among SVB clients, estimated at less than 7% of the total.
The latter must wait for the authorities to find a buyer for the bank that will assume the return of these deposits.
“Certainly this is going to have big consequences for Silicon Valley and for the entire venture capital financing economy, unless the government can ensure that the situation is controlled,” analyzed the former Treasury Secretary Lawrence Summers.
After which, the head of the area during the Bill Clinton administration warned that there are “dozens if not hundreds of startups that were planning to use that money to pay salaries next week” and He called for regulators to be “aggressive to contain the problem and avoid possible contagion.”
Although Summers ruled out that it becomes a “systemic problem”, he indicated that it is likely to be “some consolidation” is necessary in the banking sector.
For its part, the current Treasury holder Janet Yellenassured on Friday that the US banking system “continues to be resilient” and that regulators have “effective tools” to cope with the fall of SVB.
The unexpected collapse is also likely to have an impact on the Fed’s interest rate decision at its March 21-22 monetary meeting.
For Stephen Stanley, Santander economist, the fact may serve as a “reminder” to the authorities of the consequences of such rapid monetary tightening and that the shock will be “a strong argument for a 25-point rate hike.”
“The passivity of capital losses and rising financing costs in other institutions cannot be ignored,” Barclays economists said in a note.
However, other analysts consider that the key will continue to be the inflation data that will be released next week.
If it exceeds expectations, “andIt is unlikely that the SVB collapse will prevent the Fed from raising 50 points”noted economist Stuart Paul
The Silicon Valley run
SVB, founded 40 years ago and recognized for focusing its client portfolio on Silicon Valley startups to which large banks are usually reluctant to lend money, began to suffer a run last Thursday.
On Wednesday, its CEO, Greg Becker sent a letter to the bank’s shareholders in which it indicated that the entity had some losses of US$ 1,800 million in the first quarter and that, faced with this, it planned a accelerated placement of shares of US$ 1,750 million to clean up its capital position.
SVB was particularly affected by the sudden change in US monetary conditions: in 2021 companies backed by venture capital firms managed to raise a record US$330 billion in financing, against a backdrop of ultra-low rates by the Fed.
The bank took billions of dollars in deposits growing from $61 billion at the end of 2019 to $189 billion at the end of 2021 and, confident that rates would not change, placed more than half of its assets in bonds at long-term Treasury with a yield of approximately 1.63% per year.
However, with a record inflation in 40 years, the Fed ordered one of the fastest monetary adjustments in its history leading the thandles to a range between 4.75% and 5%, so these bonds lost a good part of their value.
Another effect of the rate hike was the impact on the technology sector, since these companies – especially in their early stages of development – are the ones that most need cheap credit to solve growth that is not profitable in its early years. Without financing, they need to withdraw their savings from banks.
In a domino effect, the sThe rate hike caused SVB’s deposits to fall and the bank had to sell its devalued bonds at a loss.
After Becker’s letter became known, a bank run in which investors and savers tried to extract US$ 42,000 million in less than 24 hours.
The withdrawal was prompted by the very own venture capital firms that advised the startups withdraw funds from the bank at the risk of insolvency.
At the time of its closure by the federal authorities on Friday, the bank registered a negative balance of US$ 958 million.
In addition to the intervention in the United States, the bank of england announced on Friday that it will declare SVB’s subsidiary in that country insolvent and return the insured savings totaling up to US$102,000 per deposit.
The fall of SVB also had its correlation in the cryptocurrency marketafter it became known that Circle – issuer of the USD Coin stablecoin – had deposited US$ 3.3 billion of its US$ 40,000 million reserves in said bank.
Despite the fact that Circle reported that it would continue to operate “normally”, the fear led other companies in the sector such as Binance and Tether they had to publish communications assuring their clients that they were not exposed to SVB.
