More than half of US tech start-ups banked with SVB.
The collapse of the famed bank happed swiftly:
– On Wednesday March 8th SVB announced that it had sold some assets at nearly a $2 billion dollar loss.
– On Thursday March 9th, its stock had dropped by over 60%. This plummet raised red flags and many VC funds recommended their portfolio companies pull out their deposits.
– By Friday, the 40-year-old bank was insolvent as a result of an old-fashioned bank run, and the Federal Deposit Insurance Corporation (FDIC) took control of customers’ deposits.
Many of the banks’ customers felt a wave of anxiety and uncertainty as the FDIC insures deposits up to $250,000.
On Sunday March 12th, federal regulators approved plans to backstop both depositors and other financial institutions connected with SVB.
Anxious clients of SVB have been assured that they will have access to all the funds they had deposited with the bank. This was a substantial concern as over 90% of deposits at SVB exceeded the $250,000 FDIC insured limit.
Many feel that this move from the regulators has prevented a massive blow to the US start up market as many start up leaders had warned they wouldn’t have enough capital to run payroll or keep companies operating.
The FDIC has put SVB into receivership and will auction off the failed banks assets.
So, what are the learnable moments coming out of the second-largest bank failure in US history?
It seems that for many of SVBs clients, SVB was either their main bank or their only bank.
Board members should be speaking with their colleagues this week about counterparty risk management. This is a critical corporate governance issue for every facet of a healthy business, not just banking.
Board members will want to understand from their CFOs or if the company is large enough to have one, treasury departments, how diversified and risk mitigated are the company’s asset distribution among banks.
As part of prudent asset allocation and risk mitigation, having too high a concentration in one bank has been shown to be a huge vulnerability.
The question one could ask about the Silicon Valley Bank board’s oversight is did the audit committee look deeply enough into SVBs duration and interest rate risk, especially in their Hold to Maturity (HTM) portfolio.
Clearly everyone has heard the message from the Treasury Department and the Federal Reserve that the US will increase interest rates as a way to counter inflation.
This message has been broadcast to the market for over 18 months. Interest rates have risen quickly but SVB should have taken swift action to mitigate any rate or duration mismatch.
In hindsight, if SVB had been liquidating some of the lost positions all along when interest rates increased and reinvesting in a more balanced portfolio, they would have almost certainly avoided this catastrophic outcome.
There are also some lessons on crisis management communications.
It is a delicate balance to think through in terms of how much you communicate and how early when your business under performs.
We can ask ourselves the question of did SVB communicate early enough? Could they have restored trust and built confidence in communicating the strength of their balance sheet as the market became increasingly anxious and looked for explanations?
Perhaps communicating in stages would have been a better approach vs dumping everything into one release that created a massive unease with customers and investors all at once.
Boards would be well served to ask management to explain their strategy for having relationships with multiple banks and how the company’s treasury / financial investment team is looking at balancing the asset allocation.
In many ways this is analogous to supply chain dependencies on a single source. We all understand that we need multiple sources for all critical parts of our supply chain. The fuel for the supply chain is the company’s financial strength.
I think for all of us who sit on private and public boards, we will come away from this with a deep appreciation of the age-old adage “don’t put all your eggs in one basket”.