White Star Capital Digital Asset Fund - newsletter #119
Silicon Valley Bank: The Bank Run of the Technology Age
Silicon Valley Bank: The Bank Run of the Technology Age
White Star Capital Digital Asset Fund - newsletter #119
As Silicon Valley Bank depositors were reassured of their money back, courtesy of FDIC, the start-up world is breathing a sigh of relief at the near miss.
The last week has seen the rapid collapse of SVB and Signature Bank, with others like First Republic also suffering in the fall out. Though the US government came to the rescue, start-ups and venture capital firms alike know that had this turned for the worse, this would have been a near-fatal blow to the entrepreneurial world.
So, in the barrage of news and analysis that has followed, we’re looking at what specifically about this bank run makes it unique to the digital age? Did SVB being a tech and start-up-focused bank play into the failures? How did this narrow deposit base impact its balance sheet in times of hiking interest rates? And how did social media play a role in the bank run itself?
For a more extensive analysis of the bank run, please see this article by our Growth Capital GPs, Bryan and Hemal.
SVB’s Tech Origins
Silicon Valley Bank was founded in 1983 by bankers who noticed that traditional banks were steering clear of the nascent but growing industry of high-tech businesses, despite third-party validation from the (also nascent but rising) class of investors - venture capitalists.
SVB extended loans to the start-ups, as well as to founders who wanted to finance loans (including mortgages) backed by their stock options. As both the start-ups and the VC class grew, so did SVB. By 2023, SVB banked an estimated 50% of technology companies in North America and the UK.
SVB’S Balance Sheet
In the low-rate environment of the 2010s, venture capital firms and their portfolio companies really benefited from cheap capital. From 2018 to 2022, venture capital investment increased from $347.6bn to $493.4bn, whilst deposits at SVB increased from $49.3bn to $173.1bn.
These deposits are liabilities, which SVB, like any other bank, sought to monetise through generating assets like loans or investments. But the velocity of deposits received by SVB meant it was difficult to transform them all into income-generating assets. Or at least, not without additional credit risk. In 2021, SVB invested a large proportion (about $91bn out of $120bn) of its investible securities into long dated (10Y) treasuries and mortgage backed securities, generating an average yield of 1.64%. The success of this asset-liabilities management was contingent on the assumption that ultra low interest rates would continue.
And yet over the past year, hawkish central banks around the world - but particularly the Fed- have tackled rising inflation with hiking interest rates. So on the liabilities side- depositors expected greater returns in line with these hikes. Yet on the assets side-there was less demand and cheap capital flowing around the start-up ecosystem, and SVB’s return on their long term treasuries investments were flat (and low).
The Digital Bank Run
SVB is the first digitally instigated bank run in much the same way that the Arab Spring was the first digitally instigated national protest.
The initial anxiety within the tech community rapidly intensified through social media, especially on Twitter, where the term "SVB" was tweeted about nearly 200,000 times on Thursday. Numerous founders and CEOs of tech companies shared their plans to withdraw their funds from the bank, indicating a loss of trust.
It was surprising to witness that even the tech luminaries, whom SVB had been serving for many years, could not resist expressing their fears about the bank, both internally with their portfolio companies and publicly on their profiles. In fact, SVB even appealed to this sentiment in its initial public statements, asking its community to stand behind them as they had always stood behind the founders. But as Xavier Helgeson of Enduring Ventures wrote, there’s a classic prisoners dilemma at play- ‘the thing about a bank run is that there’s no upside to keeping your money in the at-risk bank’. Tom Vartanian, who served as the general counsel of the Federal Home Loan Bank Board during the Savings and Loan crisis of the late 1980s, stated that no bank had ever collapsed as quickly as SVB.
The fast-paced nature of the crisis and its amplification through social media has highlighted the obsolescence of the current regulatory framework which was established in the 1930s. How another bank would avoid a similar style of digitally spread bank run as SVB is unclear. As Vartanian concluded, the entire system needs to be looked at differently in a tech-adroit environment.
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