The Collapse of Silicon Valley Bank
Silicon Valley Bank’s 40-year reign as the provider of choice for tech startups ended this week with a suddenness and brutality that shocked even the most seasoned observers of financial meltdowns.
This was the Covid moment for financial services. SVB’s VB rapid demise accelerated digital banking adoption by years, with billions of dollars in deposits funneled to digital banking competitors overnight.
Next is an accelerating shift away from traditional banks to the fintech companies that are disrupting them. Why? Because fintechs are not banks – they work with them. As such, fintechs can offer diversification across multiple financial institutions and asset classes that is challenging for offline banks to achieve, all while having zero debt or deposits on their own balance sheets.
I know this shift is underway because I see it playing out in my company right now. In this column, I avoid writing about my fintech company, Arc, which is one of those “fintech software banks”, but I must explain that in the last week alone, our customer deposits have grown more than they have in the last two years . And they are on track to double again soon. Companies that had cash with SVB and other traditional banks have turned to Arc and other fintech firms to manage their deposits because we programmatically diversify them in a regulatory environment that still does not do enough to protect depositors.
So the next thing is further regulatory reforms to prevent this similar scenario from repeating itself in the next business cycle. SVB’s overinvestment in long-term state-backed securities, and their investment of deposits in risk loans to start-up companies without collateral, should probably not be acceptable in the future.
The following are also some important questions that have not yet been answered. What were the mitigating feedback loops that caused the sudden surge in deposit withdrawals that forced the bank to sell bonds and take losses?
Why did the government step in so quickly, and to such a dramatic degree? The FDIC seized SVB during market hours instead of after close of business. This was in contrast to ’08-09 when regulators waited many weeks for Warren Buffet to step in for Goldman Sachs. Was it because SVB played a fundamental role in pioneering the modern startup ecosystem that is such an important economic engine and competitive advantage for the United States?
SVB helped fuel the wave of technology that we all now use in our everyday lives. Hopefully a buyer can be found and SVB will be back as a division of a larger bank to continue its mission.
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