SVB: Just How Bad Will Things Get?

As regulators and the market alike attempt to stem the fallout from the Silicon Valley Bank (SVB) failure, questions remain about the long-term impact on fintechs.

Last Friday’s collapse of SVB sent shock waves around the financial system as it became the second largest bank in US history to fail.

“The situation is pretty bad and betrayed a basic violation of market risk controls,” said Solomon Lax, chief executive at Revenued, a business finance platform. “It is interesting that a bank could be pretty well run for credit risk but blow up on the market.”

In particular, the market failure has raised concerns about the challenges faced by the range of tech start-ups that SVB provided support to, including fintech.

Lax said that it means the lines of credit and easier access to debt that SVB provided, which is based on a deposit and fee strategy targeting cash-rich start-ups, is dead.

“This is coming at exactly the worst time for the tech community that is heading into a recession and leaner equity financing available.

“Credit funds will occupy the hole left by SVB but at a much more expensive rate. Capital will be available but without the depositary and fee relationship to subsidise it,” he said.

In the near term, borrowers with credit lines at failed banks will need to go out and attempt to replace their lines, which could make it more difficult for some fintechs to access credit, agreed Greg Bader, an attorney at Gunster law firm.

“SVB was very focused on banking tech companies and start-ups. It is a loss to the system for this kind of institution to fail.”

Among the payment firms with deposits at the bank were Payoneer, Circle and Wise. However, these firms have since assured customers and the market that they are not heavily affected by the fallout.

Is social media the problem?

“Any bank that might be interested will value the depositary relationship like a hot brokered certificate of deposit,” said Lax, referring to the time deposit financial product that is commonly sold to US financial institutions.

“They may view it liable to disappear in a Twitter driven stampede of the herd at a moment’s notice,” he quipped.

There is a developing consensus that social media was a key factor in the downfall of SVB.

It echoes the GameStop short squeeze in 2021, which was spearheaded by a Reddit subgroup called r/wallstreetbets.

The consortium retail investors ended up raising the stock price of the gaming retailer by 1,700 percent.

“The fact that this was a bank for Silicon Valley tech bros and venture capitalists with an active social media presence may have made things worse,” speculated Ilya Volkov, chief executive at YouHodler, a Swiss fintech platform.

“That’s why they are calling this a Twitter-led bank run,” he said. “The bank’s rapid collapse was accelerated by VCs and tech industry people stirring panic on social media platforms like Twitter.”

This was echoed elsewhere, with fears that the situation could evolve much faster than previous financial crises due to social media.

“We could see other banks failing, and it could happen quicker than the 2008 financial crisis,” said Blake Harris, principal at Blake Harris Law. “Social media wasn’t as prominent then and people are now spreading information faster.”

Bader further predicted that the ripple effect of the SVB failure will cause others to fail, as there are “certainly” more banks with problems on their books.

“The key ingredients that lead to the SVB failure were a heavy concentration on an industry sector that fell out of favour with the markets and holding a lot of bonds with unrealised losses due to the current, higher interest rate environment,” he said.

“Even though Silicon Valley Bank is a regional bank, the news surrounding it presents a lack of confidence in the banking sector,” agreed Volkov.

For example, he pointed to the VIX volatility index, which measures the volatility of US stocks. “On Friday, the VIX was at its highest level since October. Hence, other stock markets around the world look at this fear and start conservative investment strategies to hedge risk or sell together.”

Furthermore, SVB might have a domino effect on other US regional banks, he warned. “We can already see shares of these smaller banks decreasing as people sell fear-based news.”

“It is a long overdue financial crisis and has the potential to be pretty catastrophic,” said Harris. “People could lose everything.”

Harris, whose firm focuses on asset protection, warned in particular that the situation could become “a warzone of lawsuits”.

“It’s going to be a burden on the financial industry. We’re going to see massive layoffs in fintech,” he predicted. “We could see a whole new wave of tech layoffs. Now is the time to do everything you can to protect your assets. When a bank fails, lawsuits get filed and people lose everything.”

The regulatory response so far

Regulators and governments have responded quickly to events, and as people begin to take stock, questions are beginning to be raised about how preventable this was.

For example, Elizabeth Warren of the US Democratic Party has so far accused regulatory oversight at the Federal Reserve of being weak.

The senator blasted Jerome Powell, the chair of the Federal Reserve, for “an astonishing list of failures” that contributed to the collapse of SVB and Signature Bank.

On the right wing of US politics, the Republican House Oversight Committee chair James Comer (R-KY) said SVB was “one of the most woke banks” and these are the consequences “of bad Democratic policy”.

Meanwhile, Florida governor and potential presidential candidate Ron DeSantis said that SVB was so concerned with diversity, equity and inclusion that it “diverted from them focusing on their core mission”.

Yet, the market has been more conciliatory on this matter.

“The government’s fast action to protect depositors at SVB, Signature, and First Republic has been critical to keeping this from becoming a much bigger problem,” said Dean Kaplan, president of Kaplan Group.

“While those who had their money at these institutions are still recovering from their fears of catastrophic losses, the reality now is that it is unlikely that bank runs will cause other banks to fail.”

Some people will argue that the government should have acted even faster, he suggested. “Had it announced funding and protection for SVB on Thursday, so much of the pain could have been avoided and it would have cost the Federal Deposit Insurance Corporation and ultimately other banks even less.”

“The response to this event by the US government was a positive one,” said Volkov. “The Biden administration said all bank customers will have full access to their deposits to calm the panic and save other small and regional banks.”

If the central banks can stop the contagion, then that is a huge success, he suggested. “If not, then similar events could happen and cause further volatility. The tech industry will recover and improve.

“This event exposed some faults in venture capitalism and banking regulation but I’m confident these problems will be addressed to minimise failure in the future.”

The response to the situation is expected to continue into next week.

On March 21, the European Parliament’s Economic and Monetary Affairs Committee will be debating the topic with José Manuel Campa, chair of the European Banking Authority, and with Andrea Enria, chair of the supervisory board at the European Central Bank.

In the UK, meanwhile, the governor and senior leaders from the Bank of England will give oral evidence on March 28 to the House of Commons’ Treasury Committee on the collapse and subsequent purchase of SVB UK.

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