Innovation Junkies Podcast

2.34 Silicon Valley Bank: A Situation Assessment

Jeff Amerine talks about the failure of Silicon Valley Bank & Signature Bank, the potential impact on technology & innovation firms of all sizes, and the need for businesses to be vigilant about who they bank with & how they manage their accounts.

Jeff Standridge (Intro):

Are you ready to change the trajectory of your business and see massive improvements? Each week we’ll share strategies and practices to generate sustained results and long lasting success in your organization. Welcome to the Innovation Junkies Podcast.

Jeff Amerine:

Hey, everybody. It’s Jeff Amerine here for another episode of the Innovation Junkies Podcast. Today I’m riding solo. This is going to be a quick hit topic.

We’re going to talk a little bit about some of the market mayhem and disruption we’ve been seeing through the kind of unexpected and unforeseen failure of Silicon Valley Bank by way of background. Silicon Valley Bank has been one of the leading institutions in terms of providing debt finance in support of equity investments from venture capital firms. In fact, one estimate said that over 50% of all the venture backed firms in the country had some tied to Silicon Valley Bank.

And here recently, this is in mid-March, Silicon Valley Bank was essentially insolvent, had a run on the bank in about 24 hours. During a particular week, $47 billion were withdrawn and they were sort of upside down on their balance sheet, increasing interest rates from the Fed had put them in a squeeze and they were underwater on some of their bond purchases.

And you can attribute it to a lot of things, bad governance, bad leadership, not focusing on the right things, but what that meant for many in the space of technology and innovation firms of all sizes was this firm that was the 16th largest in the country, had failed unexpectedly and 97% of all the deposits were above 250,000, which is the FDIC limit on insurance protection repayment.

And so over the course of this weekend, after this had occurred the previous week, the Fed, the federal regulators, the FDIC and the administration said, well, we’ve got to backstop this thing and ensure all deposits. That same time, another bank that had a similar portfolio mix, they’d provided some venture debt. They were also heavily into real estate and property management called Signature Bank of New York had a similar issue.

All of the regional and smaller banks that are not in that Dodd-Frank category of too big to fail were concerned that there might be an ongoing run on the banks. And so there’s been lots and lots of discussion about whether or not the FDIC will insure all deposits. Now, clearly there’s a possibility, moral hazard. And I guess if you can infinitely print money as the Federal Reserve and the U.S. government can, then you can support that.

But there’s lots of questions about whether or not that will be good and a long term impact in the long term scheme of things for the economy. Right now, it seems like at this point that things have settled out, but it highlighted a few key points for operators, innovators and entrepreneurs and business leaders–account concentration in any one bank is dangerous thing to do.

It’s also difficult if you presume that $250,000 limit, you’ve got a multimillion dollar monthly payroll, that you can work your way through some of the strategies for that are having supplemental insurance on those accounts, having sweep accounts. There’s a variety of things that you can do. It will be interesting to see how the FDIC ultimately comes down on if you have essentially insurance or backing to the maximum amount of your deposit.

But again, it highlights this idea: if you’re managing risk, don’t assume that your money is secure in a particular bank if you got more than that $250,000 limit. It also indicated that we really need to kind of keep our eye on the ball and we do diligence as a small business owner or emerging enterprise, large enterprise and who we bank with, just like who we take investment from, just like who our customers are, just like who we hire has got to be something that requires additional scrutiny. You’ve got to be confident that you’ve got the right kind of leadership there so that those funds are secure. 

Will we see more of this? Uncertain at this point. It doesn’t look like the contagion, so to speak, is going to be anything like 2008, but it’s hard to say. There are competing alternatives for deposits that are longer term or treasuries that will compete with the normal kind of returns that you can get.

So, hopeful there won’t be more runs on banks. But everybody that’s in this world of finance and has money in the bank needs to be paying attention to it at this point. And if you have more questions, this sort of stuff is the stuff where we live all day, every day to help our clients. Don’t hesitate to reach out to us at the Innovation Junkies. We would be happy to help you work your way through these issues in the future. 

Jeff Amerine (Outro):

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