As Silicon Valley Bank Folds, Can FinTech Outrun the Bank?

Silicon Valley Bank has collapsed. The regulators have circled the wagons.

The damage is limited.

May be.

Maybe just for a day, because who knows what will come next?

When Friday’s stock market roller-coaster ride was over, no one could answer that question.

The The FDIC has done what it could do, after closing SBV Financial and announcing that insured depositors will have access to their deposits by Monday when branches reopen, under the control of the regulator next week. One might imagine that there would be a battle between venture capital (VC) firms, portfolio companies and individual account holders to get the money out and figure out what to do with it later.

This is Silicon Valley, we note, where $250,000 covered by FDIC insurance can be called:

Lunch.

That’s a heavy-handed way of saying that while Silicon Valley Bank has been undone by a classic run where the bank ran out of money and lost the faith of its customers (and Wall Street), this is a banking model of a different stripe.

It will take time to find out what, how and when the funds will be disbursed. But as listed on the FDIC website, that $250,000 is what is covered “per depositor, per insured bank, for each account ownership category.” There are different account ownership categories, and depositors can actually qualify for coverage “if they have funds in different ownership categories and all FDIC requirements are met.”

There are at least some indications of the process underway. IN The FDIC announcement that came Friday that created the Deposit Insurance National Bank of Santa Clara, which now holds the insured deposits of SVB, “The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receipt for the remaining amount of their uninsured funds.” In a piece of news that drives home the fact that nothing is certain and much depends on the processes taking place: LendingClub Corp on Friday said in an SEC filing that it has $21 million in funds on deposit with SVB and “recovery of funds will be subject to the FDIC process.” The money is not material to LendingClub’s liquidity, but it is a tacit acknowledgment that things have to play out (and that some money may be lost).

A game on Monday?

Let’s assume that the majority of depositors will withdraw their holdings – the company has said that in the quarter that ended in December it had about $348 billion in client funds. Of this, 173 billion dollars was held in deposits. There is a lot of dividends and receipts.

Drill down a bit, and 6% is held in private banking, and 30% in early stage technology. These are the founders and high-net-worth individuals, the tech shops who would be inclined to get their money out — but the question becomes where they want to put it. The impact will be widespread, given that 11% of the funds are held internationally.

SVB’s loss could be a bonanza for neobanks – many of them are startups themselves, so we’ll see if they have the capacity/ability to bring in a mad rush of new customers. As noted by CNBC, Brex has already seen billions of dollars inflows from SVB customers. So has JP Morgan Chase and other more traditional names.

Among the big unknowns, however, is what kind of contagion it might be, and whether FinTechs and the new technology companies will be able to outrun the specter of the bank runs. The cash burn that SVB referred to in its announcement this week that it was trying to raise liquidity is real – and it will follow these firms wherever they park the funds they (eventually) took out of SVB.

Should the same pressures persist, where rising interest rates and a tougher capital-raising environment could push new customers at Brex and elsewhere to struggle with cash management and liquidity, the new banks could face their own pressures.

It may be that as these customers continue to spend, deposits will continue to shrink, and no financial institution (FI) wants that.

Looking back, it was a week that, improbably, made Silvergate Capital’s implosion seem like a drop in the bucket. We’ve seen this story before, not too long ago. When banks failed in 2008, banks faced questions of viability and found themselves fenced off by regulators to avoid contagion.

And the old aphorism that never rings true won’t ring true this time either: This time it’s different.