It is fitting that Silicon Valley should be home to the first significant digital run on a bank. Thanks to tech innovation, withdrawing money means going online these days, not queueing round the block. Hence the speed with which Silicon Valley Bank was taken over by regulators last week following $42bn of withdrawals. Opportunists have the chance to move fast too.
Some 10,000 small businesses each with over $250,000 in deposits — the maximum insured by the Federal Deposit Insurance Corporation — banked solely with SVB, according to Y Combinator, an early stage investor. They are likely to have trouble paying employees and meeting other near-term costs.
Both the US and UK governments have promised support for depositors. In the US, venture capital firms will step in offering loans to some. Others may try to use inaccessible deposits to raise funds. Jefferies is reportedly offering to buy deposits at 70 cents on the dollar. That is a neat deal if the recovery rate is closer to Moody’s expected 80-90 per cent for uninsured depositors.
Well-funded tech companies may spot an opportunity to buy distressed start-ups. Fintechs like Brex can, meanwhile, sweep up fleeing SVB customers. There will be broader spreading of deposits by customers of smaller US lenders. Alternative venture debt providers will have their pick of deals. Investors can use the uncertainty to drive funding downrounds.
As for Silicon Valley Bank itself, a buyer may yet appear. Its role servicing the tech sector is valuable. Despite the downturn, tech remains more highly valued on a forward p/e basis than any other sector in the S&P 500.
SVB’s interest rate risk was a double whammy. Rising rates lowered demand for tech investments. The deluge of deposits driven by high valuations in its start-up customer base turned to withdrawals. Deposits fell from $198bn in early 2022 to $175bn by the end of the year.
Meanwhile, the value of long-dated bonds in its portfolio dropped. Parent SVB Financial’s price to book value had crashed from 2.4 times a year ago to 0.5 before regulators stepped in.
Buyers have the chance to buy a loan book valued at $74bn last year. Net charge-offs — debts unlikely to be collected — were just 0.10 per cent of total.
This will rise. The creditworthiness of customers with deposits stuck at the bank will fall. For prospective buyers risk and reward are in acute balance. It would be safer to wait for contagion risk to abate before bidding. But financial authorities will favour a speedy sale to reduce that very risk.
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