The scars left by the failure of Silicon Valley Bank. ‘Let’s have a meeting next week’ is too late for bank runs in the digital age

Fintech firms that provide banking products to startups and SMEs have also seen billions of dollars inflows following the SVB bankruptcy.

CNBC reports that Brex, which pulled out of small business services more than a year ago, has already absorbed billions of dollars in SVB deposits. Startup fintech Mercury has doubled its account opening staff to 60, including sending out sales reps and software engineers to handle inquiries, Forbes reports.

Rex Salisbury, founding partner at Cambrian Ventures, said fintechs were among the first to change their marketing messages to highlight key features, and companies were quick to add new features. It is said that there was also

This is a welcome opportunity for the fintech community, which has been hit hard over the past year by the downturn in the tech industry. While the space is already highly competitive, VCs expect a new wave of startups focused on helping peers and small businesses to bank.

Tyler Griffin, co-founder and managing partner of Restive Ventures, said:

“This could be a boon for local banks, as many startups need a banking partner to do the back-end work.”

But questions remain about whether the money will stick, or whether it’s a safe landing place for SVB’s former clients.

That’s the view of Brad Svrluga, co-founder and general partner of VC Primary.

“Perhaps regional banks can play an important role, but we cannot say that they are less vulnerable than the SVB.

All of these banks are in the business of leasing banking facilities to smaller banks you may never have heard of, like those in Nebraska or South Dakota.

These are not structurally significant financial institutions, at least from the perspective of the federal government, so there will be some risk.”

Startups Losing Loyal Lenders

SVB’s biggest contribution to the tech industry was arguably its role as a lender.

From lending to unprofitable startups to mortgages for underfunded founders, it was the bank for Silicon Valley entrepreneurs and undertook all their financial needs.

At the time of its collapse, the bank had a $70 billion line of credit. That included traditional startup venture bonds, real estate loans and even loans to luxury wineries.

“SVB has shown us a business plan that big banks would shy away from,” said Ashley Tyrner, CEO and founder of FarmBoxRX.

SVB was also known for working constructively with companies when problems arose in ways other financial institutions did not.

“SVB was trying to solve the financing problems they had. They didn’t take a heavy-handed approach,” said Stage, a private-equity firm that buys struggling startups to help them pay off debt. Stage) general partner Krista Morgan said.

SVB’s new CEO, Tim Mayopoulos, who was nominated by the FDIC to regain customer confidence, has declared the bank “in operation,” respecting existing credit limits and It has announced that it will issue new loans.

But competitors are already moving. Billy Libby, managing partner of Upper90, a startup lender, has received dozens of calls and emails in recent days from customers wanting to refinance their loans from SVB. said to have received it.

In the short term, business is booming for Libby. But he worries about who might come in to fill the void.

“A lot of private credit companies are willing to give us a shot,” says Libby.

Investment firms such as Apollo, Blackstone and KKR are all major players in private credit. These dealmakers are already weighing how to capitalize on SVB’s demise.

Bloomberg recently reported that private credit giants such as Blackstone, Ares Management and Carlyle Group are in talks over SVB’s loan receivables.

As of March 16, Blackstone was evaluating potential acquisition deals, this time targeting early-stage companies, said a source familiar with the matter, who spoke on condition of anonymity. It says.

But Blackstone invests mostly in more mature companies. If they were going to do a deal, they would avoid venture debt, the person said.

Non-banks tend to charge higher rates than the SVB would have offered. That could drive up the cost of capital for startups already struggling to survive during the tech winter of the past year.

“A week ago I thought it would be difficult to raise money, but now it’s gotten even worse. I’ve run out of really good cheap borrowers,” Morgan said. To tell.

VCs fighting each other

Rumors that SVB was in trouble swirled under the surface for months, but it only surfaced on March 8 when SVB’s potential financial troubles surfaced on social media. was the trigger.

The next day, VCs and founders began publicly calling for the withdrawal of funds from SVB on Twitter and Discord. SVB was shut down by regulators on March 10, less than 48 hours after the panic began.

It was the fastest bank run in history and a perfect example of how fast money outflows can happen in the digital age.

In the days that followed, an exchange of accusations began in the normally tight-knit industry. Some say the VCs’ initial panic on social media was like yelling fire in a crowded room.

“It’s sad to see all this turmoil,” Brian MacMahon, head of VC syndicate Expert DOJO, told Insider. talk.

“SVB has had a good relationship with VCs for many years.

On March 15, the anonymous author of a WordPress-powered site called SVB Hall of Shame emailed the site’s URL to group recipients with BCC.

The site’s preamble reads, “It is the players within the VC community who have caused and exacerbated this uproar, and they are to be held accountable,” it continues.

“Future founders will know who you are. It will be done.”

Regulation suitable for the digital age

SVB’s failure would be the second largest in the US after Washington Mutual, which had $307 billion in assets during the 2008 financial crisis.

After the 2008 financial crisis, the Obama administration introduced a number of protections and regulations, including the Dodd-Frank Act. But then, in 2018, the Trump administration enacted deregulatory legislation, softening some of those rules.

Crucially, it raised the threshold for systemically important banks to $250 billion. This meant that smaller banks, including SVB, were less heavily regulated under the Dodd-Frank Act.

Kairong Xiao, a finance professor at Columbia University Business School, said:

“Many people say, ‘With all this regulation after Dodd-Frank, are banks still going to fail? All the regulations are covered in small print.

At the time, the deregulation law was to change the threshold, so no one was interested. This is the result.”

Already, regulators are debating the need to rethink regulation of regional and mid-sized banks, Xiao continues.

Meanwhile, both Senators Elizabeth Warren and Richard Blumenthal have filed complaints with the U.S. Securities and Exchange Commission (SEC) and the judiciary over possible misconduct by SVB executives and bankers. It has asked the ministry to conduct an investigation into the bankruptcy.

Another concern for regulators is how to monitor this increasingly digital world.

“Regulators need to be prepared to act fast. ‘Let’s have a meeting next week’ is too late. We need to know what rumors are circulating and deal with them with the right information as soon as possible.” (Xiao)

Tom Vartanian, who served as General Counsel to the Federal Home Loan Bank Board during the S&L crisis of the 1980s, also said bank regulators had to adapt to the current trend. , 2nd and 3rd SVBs are expected to go bankrupt.

“The current regulatory structure dates back to the 1930s, but is becoming obsolete due to technological advances. Vartanian)