March 13, 2023 – Among America’s largest banks and formerly well-regarded by analysts, investors, and venture-backed companies alike, the sudden failure of Silicon Valley Bank (SVB) last week sent shockwaves through the venture capital and banking industries. Though not a household name, SVB held over $209 billion in total assets and was the bank of choice for many tech startups and venture capital funds, boasting nearly half of U.S. venture-backed technology and life science companies as customers, according to the bank’s Q4 2022 Financial Report.
SVB’s sudden collapse has sparked fears for some that a repeat of the 2008 financial crisis was unfolding, although most analysts believe such fears are unfounded at the moment. However, federal regulators’ subsequent closing of Signature Bank on March 12, 2023 suggests that significant concern remains regarding the venture ecosphere’s access to liquid capital.
Events that Led to SVB’s Failure
SVB’s investments were heavily concentrated in the venture ecosystem, and a substantial percentage of its deposits were those of startups and other technology-based businesses. With many depositors increasingly unable to access investments from venture funds and other institutional investors, those depositors were forced to rely on their own cash reserves, and the ensuing withdrawals began to deplete SVB’s available capital. In turn, SVB began to sell assets to satisfy the withdrawal requests, consisting primarily of billions of dollars in bond holdings. The current interest rate environment meant that SVB sold these assets at a $1.8 billion loss, which spooked investors and depositors. SVB’s stock price decreased more than 60% in less than 24 hours, leading to a bank run on its deposits and culminating in the California Department of Financial Protection and Innovation shutting the bank down last Friday and appointing the Federal Deposit Insurance Corporation (“FDIC”) as receiver. Regulators also closed Signature Bank on March 12, 2023, after panicked depositors rushed to withdraw cash to avoid a fate similar to that which SVB depositors experienced.
What Happens Now?
The FDIC issued a joint press release with the U.S. Department of Treasury and the Federal Reserve Bank, announcing that the FDIC would make all depositors at both institutions whole, with respect to both insured and uninsured deposits, by declaring a systemic risk exception. While there is no recent precedence for such an action, the release expressly states the action is intended to strengthen the public’s confidence in the banking system.
The joint press release also stated that depositors will have access to all of their money starting Monday, March 13. However, given the size of uninsured deposits and the volume of transaction requests, it is unclear how quickly individual depositors may be able to transfer their cash.
It is important to note that the FDIC insures up to $250,000 of funds on deposits at FDIC-insured institutions, per depositor, held in checking accounts, savings accounts, money market deposit accounts, certificates of deposits, and cashier’s checks. Those clients able to recover their deposits from SVB should be mindful of the $250,000 insured limit when re-depositing those funds with new banks. Before moving money to a new account, clients should also check their existing loan agreements for any requirements to maintain bank accounts at the lending bank.
If your business recovers deposits from SVB or Signature Bank and needs to move them to a new bank account, there are numerous qualified commercial banks ready and able to assist new customers. In order to expedite the process, you should be prepared to provide the new bank with at least the following for the account opening:
Effects of SVB Failure on the Venture Ecosystem
Despite the federal government’s efforts to restore funds to SVB’s and Signature Bank’s depositors, the media is expressing concern about the broader venture ecosystem as both venture capital funds and startups were heavily reliant on SVB for access to capital. However, there are reasons to be optimistic this failure will not precipitate a larger financial crisis, as was the case in 2008. In 2008, too many banks were overexposed to low-quality debt assets, which was neither the case with SVB, Signature Bank, nor the present banking industry, generally. Nevertheless, the short-term outlook for the venture ecosystem is unclear. Ulmer will continue to monitor developments surrounding the SVB failure and will update this note as new information becomes available. For additional guidance, please reach out to a member of Ulmer’s Commercial Finance practice group.
The information provided in this client alert speaks only to the information and guidance we have available as of the date of publication and is subject to change. We will continue to follow further issued guidance and regulations and endeavor to post those updates via our website. Please continue to follow these updates at ulmer.com. This legal update was created by Ulmer & Berne LLP, and is not intended as a substitute for professional legal advice. Receipt of this client alert, by itself, does not create an attorney client relationship. For any questions, or for further information, please contact Alan W. Scheufler at email@example.com.