On the afternoon of Friday, March 10th, Silicon Valley Bank collapsed. The impacts immediately reverberated across the startup and venture capital ecosystem. Funds and founders alike rushed to withdraw capital from the failed bank that once provided so much support and access to those same companies. Surreally, at the notoriously fun and high-energy SXSW conference, speakers and founders rushed off stage in panic, and technology industry employees were glued to cell phones for hours.
The Endeavor network was not immune: Endeavor Entrepreneurs, mentors, board members, and staff immediately mobilized to identify who was impacted and how to support them. With a mission to support founders in overlooked and emerging markets, Endeavor Entrepreneurs were, fortunately, less exposed than high-growth companies in the Bay Area.
One particular Endeavor mentor, Mac Thompson, is a leading expert in banking, economics, and finance. Thompson is currently the Co-founder and CEO of White Clay, a pricing and profitability software platform for regional and community banks. He previously led payments for Bank of America and teaches banking courses for the American Banking Association at the Wharton School of Business.
Thompson was recently featured on Endeavor’s Multiplier Effect podcast to discuss the SVB and banking crisis more in-depth. You can listen to the episode here.
Here is the story of SVB’s demise from Endeavor Mentor and banking expert Mac Thompson:
Silicon Valley Bank’s (SVB) collapse was driven by a run on the bank by its depositors. SVB depositors withdrew $42B in deposits on March 9, 2023. On March 10th, an additional $100B of deposits was scheduled to depart the bank before California regulators took possession of the bank with the FDIC as the receiver.
Three major drivers drove the bank collapse:
First, the bank had grown rapidly. The bank had deposits of $7.4B in 2008, $61.8B at the end of 2019, and $173.1B at the end of 2022. Did the organization grow its governance capability to match?
Second, the bank invested a large portion of those deposits, $118B, in long-term federal mortgage back securities and federal treasuries. The investment in long-term bonds in a rising interest rate environment reduced the value of the bonds, creating an unrealized investment loss of $17.8B. The loss was not realized due to their “Held-To-Maturity” accounting status. When depositors began transferring their deposits to other institutions, the bank couldn’t liquidate their positions without realizing the loss. The bank only had $15.5B in equity capital.
Third, the bank’s business model concentrated on large technology growth companies with significant interrelated relationships. The deposits were concentrated in less than 40,000 business clients with interrelated relationships. A traditional retail/commercial bank of their size would have millions of retail and business clients. This interdependence factored into the bank run.
There was a failure of interest rate risk management and governance by the management team, the board of directors, and the regulators actively overseeing the bank.
The government intervention provided the clients of Silicon Valley Bank with rapid access to their deposits to perform daily functions like payroll and paying suppliers/vendors. The government also guaranteed all deposits.
The Federal Reserve also established the “Bank Term Funding Program” to provide additional liquidity for other banks. The program provides access to liquidity backed by investments in mortgaged-backed securities and US Treasury Bonds at their original value.
The banking system is sound. Silicon Valley Bank was an outlier due to its business model, questionable investment strategy, and problematic governance. The rapidly rising interest rate’s impacts on liquidity in the banking system have a mitigation tool now in place with the “Bank Term Financing Program”.
For the high-growth companies with large cash balances, I have the following recommendations:
- Clearly designate a Treasurer for your organization with defined roles and responsibilities. I would also work with your board to define controls and governance.
- Utilize your bank’s Insured Cash Sweep (ICS) product as part of their Treasury Management product suite. ICS provides FDIC coverage in excess of $250,000 by effectively distributing the deposit balances across their network of banks to remain within FDIC coverage. You still have access to the balances centrally and transact as normal.