Market fears systemic effect of Silicon Valley Bank failure

The collapse of Silicon Valley Bank (SVB) has already instilled fear among founders and management teams to the point that they are looking for safer havens for their remaining cash, which could trigger a bank run on all other smaller banks. The warning comes from serial entrepreneur and venture capitalist Garry Tan, current CEO of Y Combinator, one of the most famous acceleration programs in the world.

The truth is that the crisis of the American bank, which specializes in financing technology startups, is yet another chapter in the most tortuous scenario that has been faced by the global innovation ecosystem after the turn of 2021 (which was record breaking for risk investment in Brazil and worldwide).

Last year and the beginning of 2023 have seen a decline in contributions and layoffs in technology companies and, consequently, in technology-based companies. A scenario resulting from greater instability from rising interest rates and inflation, persistent war in Europe and a hangover from the pandemic, where demands for digitalization inflated the market.

And that’s an essential part of explaining the bank’s closure – a decision taken last Friday by the California Department of Financial Protection and Innovation, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. The measure was taken by regulators to protect account holders after an avalanche of bank withdrawals last week. Until the beginning of the month, SVB was the sixteenth in the ranking of institutions in the USA.

To try to calm the market, came the intervention and declaration of US government bodies, such as the Treasury Department and the Federal Reserve, which stated that taxpayers would not bear any cost associated with the new plans around the Silicon Valley Bank .

“This bank liquidation event affects the entire financial system, calling into question the quality of the regulators’ criteria, as happened in 2008, after the bankruptcy of Lehman Brothers”, analyzes the CIO of Futurum Capital, Ricardo Veles.

According to him, to ensure that there is no chain break between several companies that kept their deposits at the Silicon Valley Bank, the FED guaranteed the possibility of withdrawals by the bank’s customers. Debt holders and shareholders are not covered by this mechanism.

“We believe that the tendency is for SVB to end up being acquired by another institution, which would avoid greater market fear and reduce stock market volatility in the short term”, he projects.

Going back to the testimony of Garry Tan, CEO of Y Combinator, helps to understand the size of the problem: in the Y Combinator community, one third of startups used SVB as their only bank account. “As a result, they won’t have the money to run payroll for the next 30 days. By this measure, we can estimate that payroll-related leave or termination will affect more than 10,000 small businesses and startups,” he says in a note published on the accelerator’s website.

On Twitter, Mark Suster, from the venture capital team Upfront Ventures, recommended that each company talk to its board and investors to define the best way to invest. “At a minimum, you need to set up an alternate bank and put no less than 3 months of cash there. The reason is that, if there is an acquisition by the FED, it is possible that you will not be able to access the money for a short period of time”, he warns.

“The collapse of Silicon Valley Bank (SVB) has already instilled fear among founders and management teams to the point that they are looking for safer havens for their remaining cash, which could trigger a bank run on all other smaller banks.” Garry Tan, Serial Entrepreneur and Venture Investor

“SVB is a big bank with big customers. I don’t have inside information, however, it’s hard to imagine that banks that coveted serving the technology sector weren’t keeping an eye on this. We suspect they will find a buyer soon.” Mark Suster of the venture capital team Upfront Ventures

“The Federal Deposit Insurance Corporation (FDIC) transferred all deposits – insured and uninsured – and substantially all assets of the former Silicon Valley Bank of Santa Clara, California, to a newly created, full-service ‘bridge bank’ operated by by the FDIC in an action designed to protect all Silicon Valley Bank depositors.” Official note published on the SVB website this Monday