Ed. Note: This is a work in progress. Please check the latest information.
[Update: 8:25am PT: The uncertainty is fueling expectations that the Federal Reserve will be forced to rethink raising rates again when it meets on March 22 to make its next decision on rates. The two-year Treasury yield, a barometer for interest rate change expectations, has fallen to just above 4 percent, its biggest drop in 35 years.]
[Updated 3/13/23 7:30am PT] Members of the tech and venture capital community, and many around the world, mustered their courage today in the aftermath of last week’s Silicon Valley Bank failure, the second-largest bankruptcy in history.
The terror continued on Monday morning. Shares of San Francisco-based First Republic Bank, the 14th largest bank in the United States, plunged 78% in his first hour of trading.
But some big relief came Sunday night as US federal regulators took decisive action to restore confidence in the banking system.US Treasury Department, Federal The Reserve Board and the Federal Deposit Insurance Corporation (FDIC) have announced that the FDIC will govern the banks and protect all depositors. Most importantly, depositors will now have access to all funds, not just the $250,000 minimum guaranteed before the announcement. The funds will be available today, according to the regulator.
The regulator also said it took control of a similarly faltering New York-based signatory bank after becoming a major banking service provider for businesses in the cryptocurrency market. Regulators have announced a “systemic risk exception” for both banks. This exception allows regulators to take special measures beyond their minimum obligations. It is used in rare situations where investor anxiety can snowball if regulators do nothing.
On Monday morning, President Biden also stepped in to restore confidence. “One, don’t panic. Second, there is no taxpayer relief. Third, there is accountability. He said he would seek stronger regulation of banks and promised that taxpayers would not bear the losses.
The Fed also said it would launch an emergency lending program to provide additional funding to eligible depository institutions. This allows banks to meet the needs of all depositors.
Prior to the president’s remarks, shares of First Republic Bank, Western Alliance and PacWest Bancorp all fell sharply in pre-market trading of other regional banks in the United States, while shares of European banks also fell.
The point of concern is payroll
On Friday, Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation, with the FDIC named as its trustee. This came as banks struggled to meet the often frantic demands of their customers to withdraw large amounts of uninsured assets.
However, it’s still not entirely clear how the FDIC could take over the bank and avoid losses before finding the owner (perhaps at a cost to taxpayers).
The FDIC’s move should forestall the ripple effect of unpaid paydays for tech start-ups. Young companies like this have long relied on Silicon Valley banks. Over the last few years, deposits have increased dramatically as VC funding has grown and startups have opened stores. For many people, nonpayment of salaries is their most pressing concern.
Treasury Secretary Janet Yellen said Sunday that SVB depositors include many small businesses that “depend on access to funds to pay the bills they hold and employ tens of thousands of people across the country.” said to contain
It’s unclear how many businesses missed the window to withdraw funds last week. According to reports, ad tech firm Acuity Ad Holdings, metaverse platform provider Roblox, and set-top box maker Roku said on Friday that the deposits he held at SVB were not available. he is one Similarly, cryptocurrency finance firm Circle Internet Financial Limited said in a tweet that wire transfers to initiate withdrawals of its $3.3 billion U.S. dollar reserve were “not yet processed” as of Friday. rice field.
The collapse of Silicon Valley Bank, the 16th largest bank in the United States, with 8,500 employees and a favorite lender of startups and venture capitalists, was not only a financial disaster, but also a social media phenomenon.
It was the first ever social media-enabled bank run, as rumors and fears about SVB’s solvency spread online, causing massive deposit withdrawals by customers and investors.
The bank run began on February 23 when Byrne Hobart, author of the popular VC newsletter, published a newsletter pointing out the risks of SVB. The post quickly went viral, amassing thousands of comments and shares on Reddit, Twitter, Facebook, and other platforms. Some users urged others to withdraw money from his SVB before it was too late.
Industry observer Ray Wang, founder, chairman and principal analyst of Constellation Research, speculates that this social drumbeat occurred against a general background of institutional mistrust.
“Especially since Covid-19, we have put very low trust in the system, which causes big problems,” he said. “People no longer trust their institutions.” Wang also cited his lackluster IPO market as the driving force behind SVB’s rise.
Silicon Valley Bank, a long pillar of the U.S. high-tech venture capital ecosystem, had approximately $209 billion in total assets and $175.4 billion in total deposits as of December 31, 2022.
In large part, the rapid decline in banks has been attributed to the US Federal Reserve’s aggressive interest rate hikes. This is putting new pressure on growth-oriented and well-funded tech startups.
Silicon Valley Bank’s unique structure demonstrates its reliance on a relatively narrow set of depositors and a reckless bet on long-term bonds that has been heavily impacted by Fed rate hikes. To raise money, banks were forced to sell those bonds at huge losses.
Rating during review
“The IPO market conditions (which were much less last year) mean VCs need to be more cautious as they wait for the market to get better,” Wang said. “But it’s going to be even harder for tech startups because of what’s happening now.”
Wang’s remarks to VentureBeat were made on Sunday before news of the Fed’s bailout was announced. He said he expects startups to stockpile instead of throwing in cash. He said the industry will keep a close eye on data on salaries and wire transfer rates as the story continues to unfold.
Avoid the final crisis?
Amid the recent debate over the reality of startup valuations, a funding shortfall has emerged. The Silicon Valley bank run may spur a further reassessment of valuations.
“If startups end up losing money on SVB, the available runway will be reduced. said one startup investor who spoke of SVB’s failure on the condition that it not.
“Businesses are always trying not to repeat the previous crisis, so expect to be much more careful about where they put their cash,” they added.
Including reporting by Matt Marshall and Michael Nunez.
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