The fall of Silicon Valley Bank (SVB), the largest in a US bank since that of Lehman Brothers in the financial crisis of 2008, exposed thousands of tech startups that might not be able to afford salary payments due to the impossibility of withdrawing the funds that they had deposited in the entity.
The provider of salary payments Rippling notified its clients that their processing has been halted as SVB acted as an intermediary.
But not only Rippling, a startup, is in difficulties but also a multitude of Silicon Valley tech companies that were SVB clients.
“Over half of tech companies had the bulk of their money in SVB and they will all have to pay salaries from the beginning of next week,” he told the Bloomberg agency, greg martinfounder of the investment firm Liquid Stock.
Some CEOs of these small and medium-sized companies in the sector will use their personal savings to pay their employees, while others are considering layoffsamong other options on the table.
The Federal Deposit Insurance Corporation (FDIC)federal authority that will be the depositary of the bank’s funds, will reopen SVB operations on Monday.
The difficulty is that government protection covers insured deposits only (that is, those under $250,000) who are a minority among SVB’s clients, estimating less than 7% of the total.
These last they must wait for the authorities to find a buyer for the bank that assumes the refund of these deposits.
“This is certainly going to have big consequences for Silicon Valley and for the entire economy of venture capital financing, except if the Government can ensure that the situation is under control”, analyzed the former Secretary of the Treasury Lawrence Summers.
After which, the head of the area during the administration of Bill Clinton warned that there are “dozens if not hundreds of startups that were planning to use that money to pay salaries next week” and called for regulators to be “aggressive to contain the problem and avoid possible contagion.”
Yes ok Summers ruled out that it becomes a “systemic problem”indicated that “some consolidation” in the banking sector is likely to be necessary.
For her part, the current head of the Treasury, Janet Yellenassured yesterday that the US banking system “continues to be resilient” and that regulators have “effective tools” to deal with the fall of SVB.
The unexpected collapse possibly also have an impact on the decision made by the Fed regarding interest rates at its monetary meeting on March 21 and 22.
For stephen stanleySantander economist, the fact can serve as a “reminder” to the authorities of the consequences of such a rapid monetary adjustment and that the shock will be “a strong argument for a 25-point rate hike.”
“The passivity of capital losses and rise in financing costs in other institutions it cannot be ignored,” Barclays economists said in a note.
Nevertheless, other analysts consider that the key will continue to be the inflation data which will be revealed next week.
If it beats expectations, “the SVB collapse is unlikely to prevent the Fed from raising 50 points,” the economist said. StuartPaul.
On Wednesday, the CEO of SVB, Greg Becker sent a letter to bank shareholders in which indicated that the entity had losses of US$1.8 billion in the first quarter and that, faced with this, it was planning an accelerated placement of shares of US$1,750 million to clean up its capital position.
SVB was particularly affected by the sudden change in US monetary conditions: in 2021, companies supported by venture capital firms managed to finance themselves for a record of US$330,000 million, in a context of ultra-low rates by the FED.
The bank took billions of dollars in deposits growing from $61 billion at the end of 2019 to $189 billion at the end of 2021 and, confident that rates would not change, placed more than half of its assets in long-term Treasury bonds with a yield of approximately 1.63% per year.
Nevertheless, with record inflation in 40 yearsthe Fed ordered one of the fastest monetary adjustments in its history, taking the rate to a range of between 4.75% and 5%, so these bonds lost a good part of their value.
Another effect of the rate hike was the impact on the technological sector because these companies -especially in their early stages of development- They are the ones that most need cheap credit to solve growth it is not profitable in its early years. Without financing, they need to withdraw their savings from banks.
In a domino effect, the rise in rates caused a drop in SVB deposits and the bank had to sell its devalued bonds at a loss.
After Becker’s letter became known, a bank run began in which investors and savers tried to extract US$ 42,000 million in less than 24 hours.
ANDThe retreat was driven by the venture capital firms themselves that advised startups to withdraw funds from the bank at the risk of insolvency.
At the time of its closure by the federal authorities on Friday, the bank had a negative balance of US$958 million.
Source: Ambito
