Silicon Valley Bank the day after

New York, Austin “The Silicon Valley Bank office is on the second floor. But they’re closed today,” explains the porter at the Park Avenue building in Manhattan, where the collapsed bank from California has its New York headquarters. The drama surrounding the tech bank has long since gripped the American financial metropolis.

US regulators have also shut down New York’s Signature Bank, which is based 16 blocks north. And in the south of the city, smaller banks in particular lost more than 40 percent on Wall Street that day. Customers and employees are unsettled.

“Yes, yes, the ATM works,” assures the man at the entrance to the Signature Bank branch in Manhattan. In fact, the device spits out the desired bills a minute later. An elderly customer who is just leaving the bank says that he has just deposited new money. “But it was funny in there,” he says of his visit, “no one really understands what’s happening.”

Monday is day one after the rescue. In a snap action, US regulators issued broad guarantees for SVB and Signature Bank customers on Sunday. They go beyond the deposit guarantees up to $250,000. The deposits at both banks have been transferred to a bridge institute and they got a new boss on Monday.

Monday is also a test of how well the handover is going, after many customers stood in panic at their monitors or in front of non-functioning ATMs at the weekend and companies wanted to withdraw billions in deposits. Monday is also the test for the markets, which are far from calm. US President Joe Biden has addressed the nation to reassure Americans that their banking system is safe.

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Renowned economist and Allianz advisor Mohamed El-Erian explains that “investors are displeased that only bank customers have been protected”. Because the state does not want to be responsible for shareholders and bond investors, “the risk of contagion is currently not banned. However, it is limited to the financial industry,” says El-Erian.

“There’s bad news right now”

On this day, two security men have positioned themselves in front of the headquarters of Signature Bank on 5th Avenue right next to the Adidas flagship store to fend off the curious. In the coffee shop next door, a young lady with a coffee mug in her hand explains: “Signature Bank is actually a customer of ours. But I think there’s bad news right now…”

It’s also the bad news that made umpteen customers make the pilgrimage to the Californian headquarters of Silicon Valley Bank in Santa Clara on Monday. Lined up there are private customers and startup entrepreneurs who have millions in the bank and worry they can’t pay their employees. After the US President’s speech in the morning, representatives of the deposit guarantee fund FDIC (Federal Deposit Insurance Corporation) join those waiting and try to calm things down.

“Americans can rest assured that the banking system is secure,” the US President said shortly before in the White House. “Your money will be there when you need it,” he added, referring to the bank’s customers.

However, the restart on Monday did not go entirely smoothly. A venture capitalist reported to the Handelsblatt that there were problems at the SVB. The money is there, but the systems are overloaded because now everyone has to transfer money away and pay salaries.

SVB drama overshadows SXSW tech show in Texas

The problems aren’t just felt on the West Coast and in New York. The nail-biter around the SVB also overshadowed the important technology fair “South by Southwest” (SXSW) in Austin on Monday. “What a weekend” is a common greeting at the fair.

For Brett Martin, for example, Monday started early in the morning. “I’ve been checking my messages since I woke up,” says the co-head of Charge Ventures, a venture capitalist that has invested in over 60 startups. Many had parked funds at the Silicon Valley Bank (SVB) – and despite the support campaign decided on Sunday, they could not access their funds on Monday morning. The situation only eased in the course of the morning, reports Martin. “There are still hiccups, but you can get your money back.”

The SXSW is considered the “Feel Good” trade fair for the tech industry: in the Texas springtime, founders, financiers, filmmakers and musicians meet at 20 degrees and sunshine. Actually, the mood is exuberant, the whole city center a trade fair zone with pop-up snack bars, stands from Slack, Porsche, Amazon, and – very un-American – drinks on the street.

After the forced closure of the bank on Saturday, Reign Ventures announced that it would cancel all trade fair appearances. Other managers looked at their mobile phones on panels or left at short notice for crisis talks. “SVB, you understand.” A cautious sigh of relief followed on Monday.

“Silicon Valley Bank is the black swan”

Legendary venture capitalist Bill Gurley, a partner at Benchmark, called the collapse of Silicon Valley Bank a “black swan,” an extremely unlikely and unanticipated event. “Doing nothing and waiting is my new habit,” he joked about the weekend’s panic. Only on Sunday did the supervisors announce that depositors would have full access to their money.

Gurley did not want to join the criticism of state intervention. He compared the recent crisis to the 2008 financial crisis, when Washington bailed out the big banks with taxpayers’ money, which it didn’t do in the SVB case. “I’m not sure it’s reasonable to expect that every startup has to give up just because they chose the wrong bank,” he said. He argued that if all of Wall Street trusted SVB, why shouldn’t startups have done so?

Venture capitalist Martin sees things differently. “The situation was chaotic and a challenge for all the founders we work with,” he told Handelsblatt. “I think it reminded all startups that you need to diversify your risk and have a plan B and a plan C.”

Most of the start-ups in which he has invested have worked with SVB and First Republic Bank, which has also come under pressure. “I spent most of the weekend trying to find out who was affected.” Even before the collapse, however, he would have advised his start-ups not to put all their eggs in one basket. “It’s never a good idea,” says Martin. Even if a whole bouquet of banking relationships makes less sense for a small start-up than for a large one. “When you have $1.5 million in cash, you don’t want to have five bank accounts.”

According to Martin, the first warnings had already been given on Wednesday evening when the SVB announced the planned capital increase. “People started talking about it straight away. In my Slack and Whatsapp groups, some said: ‘stick with it’, many others: ‘take your money and go’.”

roku had $480 million parked at SVB

The example of Roku shows that not only small start-ups can misjudge risk management. The streaming company had parked a quarter of its cash holdings, around $480 million, with SVB. On Monday, Bank of America sidestepped Roku and reiterated its Buy rating after the stock had come under severe pressure since Thursday, stabilizing the price.

Other companies had less prominent support – and had to reach out directly to their customers, for example. For example, the online toy retailer Camp gave a 40 percent discount on its range at the weekend and called on its customers to pay the full price if possible. Camp also had a large part of his cash stored at SVB.

According to insider intelligence analyst Sky Canaves, the case should become a cautionary tale. “The collapse of the SVB was not an exotic event, but simple psychology. It was a classic bank run,” she told Handelsblatt. It is now to be expected that smaller and regional banks in particular will face new supervisory requirements. “Larger banks are more diversified in terms of their investments and can more easily meet short-term liquidity needs. Smaller banks are more vulnerable when many investors withdraw their money at the same time.”

Many startups would have had no choice but to park a large chunk of their cash with SVB, Canaves said. “That often went hand in hand with a closer business relationship, such as granting lines of credit. And SVB was the only bank that offered start-ups similar benefits as larger tech companies.

“In the start-up ecosystem, you couldn’t help but work with the SVB,” said Martin – who was not a customer of the bank privately. “One of the reasons why the Silicon Valley Bank was so successful was because they had a real understanding of the life situation of founders.” Founders who had a lot of money in their accounts after the sale of their company, but no regular income often only got a mortgage with reasonable terms from the SVB. What the situation will look like in the future, for example if SVB is taken over by a large Wall Street house, is an open question.

Martin believes that there will be many more debates about the new speed in the future thanks to smartphones and social media accelerating “black swans” like a bank run. “Silicon Valley Bank grew so large because it was able to draw on such a strong, close-knit network: Silicon Valley and its venture capital. But this network was so small that the panic spread very quickly. Today, a $200 billion bank can go under in 10 hours.”

Sven Weber, partner in the investment company Knightsbridge Advisers, therefore welcomes the rescue of the bank. “Everyone breathes a sigh of relief because the founders get their money as usual,” he reports. “All over Silicon Valley you can hear startup employees discussing where to park their money going forward and what the best strategies are. But it’s a bit like after a battle: everyone is looking at how big the wounds are.”

At the SXSW in Austin on Monday evening, despite the licking of wounds, things will continue as usual: with drinks, live music – and talks about the Silicon Valley Bank.

More: US stock exchanges close stably despite the crisis – bank shares lose significantly in value