Silicon Valley Bank’s Downfall: Lessons Learned and Unanswered Questions

It’s said that those who don’t learn from history are doomed to repeat it.

The spectacular flameout of Silicon Valley Bank (and other banks subsequently), happened March 10, 2023, which seems long ago, but the ripple effects are being felt in the here and now.

The questions loom large as to what we’ve learned and what we’ve not learned. It’s what you don’t know or don’t keep in mind that trips you up, that poses existential risk, in financial services.

What Happened

March roared in and roared out like a lion last year. It was a month that saw scrambling as SVB, focused on the tech sector and specifically on banking services for venture capital firms and startups, collapsed in the wake of a bank run. The sector that SVB was focused on was, and is, high risk.

In terms of the mechanics of the run itself, there had been a mismatch in the long-dated treasuries and other holdings on the balance sheet and the short-term deposits tied to clients. VC funding hit speed bumps amid a rocky economic climate, and clients rushed to withdraw money.

SVB scrambled to sell bonds at a loss and sought capital. Panic ensued. The stock swooned, the pressures mounted and the government stepped in.

In what seems like an apt — although somewhat shorthand — way to refer to it all, some observers said that the bank run had entered the digital age. Twitter and other social media outlets sparked, and fanned, the flames.

Client firms fretted about whether they would be able to withdraw funds to pay operating expenses. The Federal Deposit Insurance Corp. account insurance, capped at $250,000, was not enough to ensure that funds would not be lost.

Toward the end of the month, First Citizens Bank assumed ownership of all of SVB’s loans and assets as SVB’s parent company filed for bankruptcy. The takeover was no final chapter because other banks also faced concerns over solvency. In another example of how banks can be swallowed up, with some government maneuvering too, UBS bought Credit Suisse for about $3.3 billion.

What’s Happening

The First Citizens takeover was not the end of the story, and, well, the saga continues.

SVB is not dead and gone, but it is transforming. The company is hiring bankers and is reportedly looking to win back some of its former business. Elsewhere, the IRS sued the FDIC over a tax debt owed by the bank.

What’s Been Learned

The FDIC has been in the spotlight in ways that it had not been in years, certainly since the financial crisis of earlier in the millennium. In the aftermath of SVB, the question of deposit insurance — how much and who should get it — has been hotly debated in finance.

The FDIC said last year that it favors “targeted coverage” among the options for deposit insurance reform. Through that option, different deposit insurance limits would be offered across account types, with business payment accounts receiving “significantly higher” coverage than other accounts.

“The FDIC believes targeted coverage best meets the objectives of deposit insurance of financial stability and depositor protection relative to its costs,” the FDIC said in May.

The topic might get some renewed interest, as New York Community Bank, which last year acquired Signature Bank, lost roughly 7% of deposits and warned of “material weaknesses.”

The lessons learned tie directly into diversification, as consumers and especially corporates eye the in-place FDIC insurance limits and spread what we might term “account risk” across a variety of holders.

Well beyond the confines of the banking collapse, and as of March 2023, PYMNTS found that chief financial officers were conducting more diligence on the banks they had chosen or might choose for deposits or partnerships, and they had shifted funds to some of the largest players.

In a fundamental shift in the corporate world, a dozen CFOs noted to PYMNTS in a series of interviews that CFOs are now tasked with managing liquidity levels and cash availability at the board, management and even employee levels. They’ve been crafting bank-risk frameworks and looking toward vendor and third-party risks, where financial supply chains are at least as important as all other business relationships.

What Remains to Be Seen

There’s a lot that has not been learned, at least not yet. Access to capital and debt was, in the parlance of banking, “easy.” Now, the pendulum has swung decidedly the other way. Many firms report that credit from traditional channels has been hard to come by.

Within tech, there’s dry powder in the VC space, as only half of the $435 billion raised from 2020 to 2022 has been spent. VC outfits raised $67 billion in all of 2023, the lowest tally seen since 2017. The wait-and-see approach, and the reluctance to deploy capital, arguably presents a headwind to growth.

We have not yet learned if the risk management strategies and CFO-as-strategic-position shifts of the past year will prove to be sufficient. The bank run, in the 21st century, looks and feels different — faster — than what was been seen before. The only certainty is that the banking system will be tested again. And as Mark Twain wrote, although history doesn’t repeat itself, it tends to rhyme.