On Friday, Silicon Valley Bank (SVB) was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.
There have been 562 U.S. bank failures since 2001, though only nine since 2018. Silicon Valley would be the largest bank failure since Washington Mutual in 2008. (In that case, JP Morgan Chase wound up buying the bank for $1.8 billion.)
It is now well-documented how SVB mismanaged its balance sheet and subsequently was put into receivership. At the end of 2022, SVB had $209 billion of assets, $74 billion in loans, and $175.4 billion in deposits, according to the FDIC.
For customers of Silicon Valley Bank, businesses with bank accounts, and every CFO connected to the failed bank — questions still loom:
The FDIC posted a frequently asked questions document for SVB customers on Saturday, but the web link was intermittent, as interested parties sought answers. FDIC spokesperson David Barr said in an email to CFO that the FAQ may have been taken down for revision and approval. On Sunday, the FAQ and other information for SVB customers was up on the FDIC website.
All CFOs directly connected to the bank would benefit to follow what happens with SVB. And even CFOs that don’t have direct banking relationships with SVB need to assess and communicate with their organizations if they have any indirect exposure.
Treasury Secretary Janet Yellen asserted on Saturday that the U.S. banking system “remains resilient.” However, on Sunday she told CBS news that there would be no bailout for SVB. Tracking the financial health of banking counterparties is now of increased importance.
Other Banks Face Similar Fixed Income Risks
Is it possible other banks could be on the same path to failure, given that they may have mismanaged their fixed-income securities portfolios during the quick runup in interest rates.
One of the unique circumstances was SVB’s business customers — they were largely startups, and primarily concentrated in the tech sector. Many shared a common profile — they had raised billions of dollars in the last three years from venture capitalists to launch their businesses and then parked that money in an SVB account.
As a result, about one-third of SVB’s customers had deposits in excess of the FDIC insurance limit of $250,000 — per depositor, not per account. Out of its total $175 billion deposits at the end of 2022, $152 billion were uninsured, according to an analysis by former hedge fund manager Marc Rubinstein. That’s a much larger percentage — nearly 88% of uninsured to total deposits — than at many other banks.
Still, other banks may be harboring paper losses on large fixed-income portfolios. Securities portfolios ballooned to $6.26 trillion at the end of the first quarter of 2022, up from $3.98 trillion at the end of 2019, according to Rubinstein. If a bank needs emergency liquidity and has to sell its fixed-income securities that have dropped in price, it could suffer large losses.
Risk consultant Kroll issued a client alert on Saturday afternoon that said SVB’s client base and funding structure both suggest that it is unlikely to trigger a systemic crisis among systematically important financial institutions (SIFIs).
“The good news is that because SVB was particularly interest-rate sensitive, it is a special case. There may be contagion to other small community banks, but the systemically important banks are unlikely to follow in SVB’s footsteps,” wrote Megan Greene, Kroll’s global chief economist.
However, other small community banks could face bank runs and insolvency, Greene said, “especially if uninsured depositors of SVB aren’t made whole and have to take a haircut on their deposits.”
Because SVB was particularly interest-rate sensitive, it is a special case. There may be contagion to other small community banks, but the systemically important banks are unlikely to follow in SVB’s footsteps. — Megan Greene, Kroll
Greene said the Fed could insist that any bank purchasing SVB make all creditors whole. “If not, businesses will recognize that their uninsured deposits could vanish overnight and will pull their money from smaller community banks and put them in the larger institutions,” she said.
Marketwatch posted a list of U.S. banks that had the greatest exposure to unrealized securities losses as a percentage of total capital, a metric that should have been a warning sign that SVB was on the verge of collapse, it said. And some banks, such as First Republic, have faced pressure from investors regarding unrealized losses on assets that exhibit a large gap between fair market value (FMV) and the balance sheet. Though in the case of First Republic, WSJ.com noted, it differs from SVB in that its securities “gap mostly is in its loan book.”
CFOs may consider, if their organization is using community, midsize, or regional banks, whether it is in their best interest and within their fiduciary duty to move operating and other accounts to a larger financial institution — one that the federal government may deem “too big to fail.”
Of course, if too many companies do that, the “withdrawals will drain liquidity from the community, regional and other banks and begin the destruction of these important institutions,” tweeted Pershing Square CEO Bill Ackman on Saturday.
The near-term risks to non-SVB customers might not come from the banking sector. Many fintech companies “have built their products on top of SVB’s payment rails, using their payment rails to move funds, [and] might face significant limits on their ability to operate,” said Tal Kirschenbaum, CEO and co-founder of Ledge, provider of an automated payments command center, in an email to CFO.
[Many fintechs] have built their product on top of SVB’s payment rails, using their payment rails to move funds, [and] might face significant limits on their ability to operate. — Tal Kirschenbaum, Ledge
Vendors of mission-critical services, including payroll, accounts payable or accounts receivable automation, working capital solutions, and health insurance, could all be affected, Kirschenbaum said.
As an example, workforce management vendor Rippling on Friday saw payroll services interrupted for some customers, preventing employees from getting paid, according to tweets by CEO Parker Conrad. Those employees will get paid over the weekend or on Monday, Parker said. Rippling moved its banking infrastructure over to JP Morgan Chase and put up collateral to fund the payments while client funds were frozen.
Similarly, the CEO and founder of spend management software provider Airbase said on Friday that there might be delays in bill payments and reimbursements in progress. Thejo Kote also tweeted that corporate cards and pre-funded accounts were not affected.
Ledge’s Kirschenbaum said CFOs should act quickly “to identify any providers that rely on SVB and ensure that they are still able to operate and support their operations and services.” On Saturday afternoon, Howard Katzenburg, founder of Glean AI, posted a Google Doc that he said listed some of SVB’s vendor customers.
A prudent CFO should never just bank with one entity, according to experts. Most banks want to rope businesses in, encouraging a company to utilize all of its products — “all the cookies in one jar.” But businesses need to diversify.
Companies should always have a secondary bank. Receivable streams should be split between different areas of the business so that money is still flowing into at least one bank.
Most businesses use one bank for payable management. If the receivables stream is split between one or more banks for continuity of operations, it is a simple matter to wire or ACH funds between banks to fund the payment of payables. It is also just as easy to switch to another pre-existing bank in a pinch to send payments to vendors and payroll.
CFOs worried about losing uninsured deposits should look into the Certificate of Deposit Account Registry Service, or CDARS. CDARS is a turnkey deposit brokerage service that enables depositors to spread out deposits at multiple banks to keep them under the FDIC-insured cap. IntraFi is the best-known provider.
Wayne Spivak, a Contributing Editor at CFO.com, is a long-time interim CFO who has worked in the SME space in multiple industries and sectors. He is a frequent speaker and was an adjunct lecturer at Lehman College, CUNY.
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