Feds Will Make SVB Depositors Whole, Avoiding Payroll CrisisHelp for Uninsured Depositors Avoids Doomsday Scenario of Startups Missing Payroll
Silicon Valley Bank's sudden and unexpected demise posed an existential crisis for numerous cybersecurity startups, which faced insolvency as a result. But that crisis has now been averted.
U.S. government officials announced late Sunday that all Silicon Valley Bank depositors will have access to all of their money beginning Monday. The decision is an about-face from Friday, when the Federal Deposit Insurance Corp. said only insured depositors would get full access to their funds Monday, while uninsured depositors would receive nothing more than an advance dividend in the coming week (see: SVB Collapse Is 'Self-Inflicted Gunshot Wound' for Startups).
"We are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system," Treasury Secretary Janet Yellen, Federal Reserve Board Chair Jerome Powell and FDIC Chairman Martin Gruenberg said in a statement released at 6:15 p.m. on Sunday. "This step will ensure that the U.S. banking system continues to perform its vital role of protecting deposits."
Avoiding a Doomsday Scenario
The distinction between insured and uninsured deposits is particularly relevant given how different Silicon Valley Bank's customer profile was from a traditional commercial bank. As of Jan. 1, Silicon Valley Bank customer deposits worth about $157 billion sat in accounts exceeding the FDIC insurance limit of $250,000, while just $4.8 billion sat in accounts that were fully insured by the FDIC.
Given how many startups in sectors such as cybersecurity had uninsured deposits at Silicon Valley Bank, catastrophe would have struck this Wednesday, when companies that pay their employees twice a month need to make payroll. To balance their books, firms that did most of their banking at SVB would have needed to sell assets, conduct mass layoffs or secure a new source of funding in mere days.
The joint announcement by the Department of the Treasury, Federal Reserve and FDIC avoids a doomsday scenario for startups and the venture capitalists that back them, which in turn could have sent the entire global economy into a deep tailspin. The decision to make uninsured Silicon Valley Bank depositors whole might necessitate a special assessment on banks to recover losses to the deposit insurance fund.
"The timely action was a necessary step to prevent a cascade of other potential bank failures that would have been a catastrophic event in the already fragile global economy," Forgepoint Capital Managing Director Alberto Yepez told Information Security Media Group. "It demonstrates that we have learned from past bank failures by instituting reserves to prevent this type of situation."
Navigating Choppy Political Waters
Yellen told CBS' Face the Nation on Sunday morning that Silicon Valley Bank's investors and owners wouldn't be bailed out. The U.S. government emphasized that fact again in the joint statement issued Sunday evening, saying that taxpayers will pay none of the cost associated with making Silicon Valley Bank depositors whole.
Federal officials say Silicon Valley Bank shareholders and certain unsecured debtholders also won't be protected.
This approach stands in contrast to the 2008 financial crisis, when the government opted to bail out large banks. Grassroots activists from across the political spectrum responded furiously to the move, which contributed to the formation of both the Tea Party movement and Occupy Wall Street. With a U.S. presidential election looming in 2024, lawmakers on both sides of the aisle don't want to appear to be putting the interests of big business ahead of ordinary taxpayers.
"This timely action was a necessary step to prevent a cascade of other potential bank failures." – Alberto Yepez, managing director, Forgepoint Capital
To reduce the likelihood of additional bank failures in the United States, the Federal Reserve Board announced Sunday it would make additional funding available to eligible institutions to ensure banks can meet the needs of all their depositors. The offer of assistance comes after New York's Signature Bank - which had $118 billion in assets as of 2021 - was closed by state officials Sunday.
In addition, U.S. government officials said Silicon Valley Bank's senior management has been removed.
Startups Face Uncertain Financing Future
The government's decision to make all Silicon Valley Bank depositors whole suggests no agreement is imminent for another financial institution to purchase the bank's assets. Some industry observers hoped another bank would take over the entire Silicon Valley Bank operation by the start of business Monday, to maximize continuity for the startup community and its financial backers. But that outcome now appears to be unlikely.
The FDIC is looking for an acquirer that has the financial wherewithal and management expertise to handle Silicon Valley Bank's assets and customers, but not one that is so large as to be considered "too big to fail" like JPMorgan Chase or Bank of America, The Information reported Sunday. The ideal bidder would likely be a regional bank such as PNC Financial, US Bank, Truist or Capital One, The Information said.
Although Silicon Valley Bank's depositors are now fully protected, startups planning to turn to the bank for loans or lines of credit will find themselves navigating choppy waters, industry observers say. Four decades of work with startups demonstrated that compared to conventional banks, SVB was much more willing to extend money to early-stage firms that sported a limited book of business and long road to profitability.
With the FDIC in charge of Silicon Valley Bank for the foreseeable future, startups might find it tougher to access the capital needed to scale up or stay afloat amid rising inflation and interest rates.
"Those startup companies that were losing money creating the Apples or the Oracles or the CrowdStrikes of the future would have had a very difficult time banking with traditional commercial bankers," Bob Ackerman, founder and managing director at AllegisCyber Capital, told ISMG on Friday. "You needed somebody that understood the relationship between innovation and risk. SVB mastered that."