Silicon Valley Bank: An ‘It’s a Wonderful Life’ bank run for the digital age
The seizure of Silicon Valley Bank by regulators Friday morning shows how brittle financial institutions can be in the digital age. The downfall of the Valley institution, which has been called “the backbone of the startup economy,” was caused by a good old-fashioned bank run, but one that ran at internet speed.
The run began on Thursday, after a powerful Silicon Valley VC—Peter Thiel’s Founders Fund—had begun advising its portfolio companies to withdraw their money from SVB, sources told Fast Company. Other VCs soon caught wind of the advisory and began advising their own portfolio companies to withdraw funds from SVB, the people said. As the withdrawals accelerated, the bank began taking steps to stem the tide and preserve its solvency—just like George Bailey did in the 1946 classic It’s a Wonderful Life.
SVB Financial Group CEO Greg Becker seemed to be reading from director Frank Capra’s script when he uttered the fateful words “stay calm” during a Thursday conference call with customers, as fears over the bank’s solvency grew. Those words probably only increased depositors’ anxieties. And the withdrawals likely continued to snowball.
“The whole thing was predicated on a few folks who put out calls to make withdrawals,” Spencer Greene, a general partner at the venture fund TSVC, tells Fast Company. “I think the folks who made those calls weren’t correct on the facts, but once the thing got going it was hard to stop.” In other words, before the run started there was not sufficient evidence to suggest the bank was facing serious solvency issues.
Not that Founders Fund acted irrationally. It had reason to be watching the bank’s business closely. SVB, which specializes in serving tech startups, has suffered from the downturn of the general tech economy that started last year. VC funding has dried up in most sectors, and now many startups are in belt-tightening mode, trying to cut down on expenses and making more frequent withdrawals from the bank to make payroll and cover other costs of doing business.
For Founders Fund, the last straw may have come on Wednesday. “The tipping point came when they announced that in order to fund the increased withdrawals they would be raising additional capital from other investors,” says Columbia University Business School professor Dan Wang. SVB said as much in a Securities and Exchange Commission filing Wednesday. “When a bank does that it can be taken as a signal that there’s something wrong,” Wang says.
And from a strategic point of view, Founders Fund actually had little to lose in making its advisory to its portfolio companies,” Greene points out. “They still did the right thing rationally, even if they perceived only a 1% risk.” If they were right, they may have just saved their portfolio companies’ businesses, he explains. If they were wrong, all that happens is that their portfolio companies move their money to other banks.
Before Thursday, SVB’s liquidity was not in serious question. The bank did indeed have plentiful assets, but they were not liquid assets that could be paid out immediately. The bank owned mortgage-backed securities, bonds, and loans—assets that are collectible later (when they’re paid off by borrowers). But in our super-connected age, a little fear—even unfounded fear—can go a long way. And fast.
“The stories of meme stocks like GameSpot and AMC have a lot in common with Silicon Valley Bank,” Greene says. “We’re seeing a situation where a lot of people can move in concert, and the speed in which the information moves causes these flash mobs to take action.”
The final act of the drama was a surprisingly fast intervention by regulators, and with a surprisingly extreme solution.
“To close a bank that presumably has positive equity value—in the initial estimates the asset value exceeds liabilities by $35 billion—and to close it before opening of business on a Friday is unheard of,” says Keith Noreika, executive VP and chairman of the Banking Supervision and Regulation Group at Patomak Global Partners. “It could spread panic throughout the market.”
Noreika adds: “A better solution might have been to grant some liquidity funding to the bank, which is presumably what the Federal Reserve is there for.”
Update: The second paragraph in this article has been updated to reflect sourcing on a claim about Founders Fund’s role in the SVB story.
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