On Friday, 10 March (Saturday AEDT), the Department of Financial Protection and Innovation of the State of California (DFPI) sent global shockwaves when it formally took possession of Silicon Valley Bank (SVB) with its appointment of the Federal Deposit Insurance Corporation as receiver (FDIC), triggering what might be the largest collapse of a bank since the Global Financial Crisis.
It marks the second of three significant bank collapses in the State of California and New York in the past few weeks, with the collapses of crypto-focussed Silvergate Bank and Signature Bank. With the announcement and implementation of a rescue package for the depositor base of SVB and Signature Bank, the extent of the fallout from the collapses remains to be seen. However, there has undoubtedly been an immediate impact on the tech and start-up industry and a highlighting of emerging structural weaknesses in regional, US and worldwide financial systems.
The Collapse
Founded in 1983, SVB grew alongside the developing tech and start-up industry, eventually becoming one of the sector’s leading banks, both within the US and worldwide. It was a key part of the global innovation economy and was known for its ability to understand and manage the fast-paced world of tech and start-up companies. SVB was also a major benefactor of the COVID-19 fuelled tech boom. During this period, many of SVB’s customers were able to raise significant equity rounds, depositing those funds into accounts with SVB and ballooning the bank’s deposits.
Despite the DFPI stating that SVB was “in sound financial condition” prior to 9 March, on 10 March it cited inadequate liquidity and insolvency as its main reasons for appointing the FDIC. In its announcement pursuant to the California Financial Code section 592, the DFPI refers to several findings of fact to justify its position as to SVB’s insolvency:
- SVB’s announcement on 8 March 2023 of losses of approximately US$1.8 billion from the sale of US treasuries and mortgage-backed securities;
- the holding company of SVB’s announcement on 8 March 2023 of a capital raise, for which investors and depositors reacted by initiating withdrawals of US$42 billion in deposits on 9 March 2023;
- the bank having a negative cash balance of approximately US$958 million as at close of business on 9 March 2023; and
- despite attempts to transfer collateral from various sources, SVB not meeting its cash letter with the Federal Reserve.
For the reasons of an inadequate liquidity position, insolvency, and its determination that SVB was conducting its business in an unsafe manner due to its financial condition, the DFPI took the next step of ordering the Commission of Financial Protection and Innovation to take possession of the property and business of the bank (and ultimately the appointment of the FDIC as receiver).
The “Bailout” of SVB depositors
To increase confidence in the US financial system, on Sunday, 12 March, the Treasury Department, the Federal Reserve and the FDIC jointly announced a form of “bailout” for the depositor base of SVB, Signature Bank and certain other eligible depository institutions with similar deposit exposures. The distinction made by US regulators with the bailouts of the Global Financial Crisis is that the protective measures seek to ensure that depositors have access to the whole of their deposits (via the guarantee of deposits above the existing US$250,000 FDIC guarantee and additional funding lines from the Federal Reserve), and do not extend to the shareholders and bondholders of those banks. While the joint announcement notes that “no losses will be borne by the taxpayer”, this remains to be seen. For example, where the amounts recovered from the sale of SVB’s assets fall short of the costs required to fund and recover any deposits, it may very well be that the shortfall and the depositors’ guarantee will be borne by the US taxpayer to some extent.
In announcing these measures, the U.S. federal government’s aim is to prevent more bank runs and help companies that deposited large sums with SVB to continue commercial operations and preserve faith in the start-up/venture capitalist market.
As for SVB itself, it is currently up to regulators to consider its options, including the potential acquisition of the bank by another financial institution (noting that it has been announced that HSBC would purchase SVB’s UK operations for £1).
Impact of the Collapse on Borrowers
Borrowers under existing SVB facilities will still need to meet their existing debt repayment obligations despite the collapse of SVB. However, consideration should be given to:
- any line fees on undrawn commitments that are no longer available;
- any ability to replace SVB as lender under “defaulting lender” or similar provisions (particularly in a syndicated or club loan); and
- any ability to “term out” revolving loans to the final maturity date.
If SVB has been granted warrants as part of a financing transaction it may be worth considering any ability to re-purchase the warrants or any control rights in relation to who can take a transfer of the warrants (i.e. if someone purchases SVB or SVB’s loan book).
In each case, the rights of a borrower/warrant issuer will depend on the underlying documentation, so it is important to seek appropriate advice.
Impact of the Collapse on the Australian Market
With the collapse of SVB, it is worthwhile reflecting on the opportunity that SVB provided to Australian based tech and start-up companies. As one of the only US banks that provided US dollar transactional accounts and products to Australian based tech and start-up companies expanding into the US market, in addition to its general expertise and willingness to provide services to high-growth and more risky ventures, SVB was a critical support system for many Australian growth companies. SVB’s demise is an invariably sad moment for the Australian and global innovation ecosystem.
While it is expected that all Australian customers of SVB will have their deposits returned and will soon have access to their bank accounts, many companies will be looking for alternative transactional banking and funding providers and partners. We have had several international banks and venture debt funds reach out to us offering to assist any companies that are impacted by SVB’s collapse and we are happy to share their details with anyone who may need assistance.
A few other thoughts:
- while relationship banks are very important, companies should consider some diversification in banking relationships, both in terms of where deposits are held but also in terms of funding lines;
- while the market continues to be turbulent, it is often useful to have access to liquidity before it becomes a critical need. Now is a good time for start-up and growth companies to consider debt products to shore up liquidity;
- more than ever before, there are a broad range of debt providers looking to assist growth and tech companies; and
- if you are impacted by SVB’s collapse and need any assistance, please reach out.
For more information, please contact Zina Edwards
