Everything you need to deal with the SVB crisis

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On Friday, the Federal Deposit Insurance Corporation announced that it had taken over Silicon Valley Bank, and as we rushed to plan coverage, one of my colleagues succinctly described the situation: “This historical nonsense. Is.”

A week later, we can all agree they were right. But a lot has happened, and unless it’s your job to edit the news, it’s possible you’ve missed a piece of the saga, if not the whole story.

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Here’s what went down:

how it started

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The drama moved into high gear in the middle of last week: SVB shares plunged more than 60% on Wednesday evening after the bank said it plans to sell shares to raise capital after charging $1.8 billion from the sale of some assets. Planned. The bank also indicated that it would boost its lending, reinvest capital in higher-yielding assets and raise more funds from an external entity.

Given the recent failure of crypto bank Silvergate and SVB’s own troubles due to its exposure to the venture capital and startup ecosystem (which is not doing well), investors sensed it and started selling SVB stock.

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Famously, on Thursday evening, SVB CEO Greg Baker said on a call with clients that the bank had “enough liquidity” to support its customers “with one exception: if everyone could is telling that SVB is in trouble, so this will be a challenge.”

The executive asked VC clients to “remain calm”. He said, “That is what I want to ask. We’ve been there for 40 years, supporting you, supporting portfolio companies, supporting venture capitalists.

We all know how it went.

Around the same time, multiple sources told TechCrunch+ that VCs were advising their portfolio companies to pull their money out of SVB for fear of a bank run.

If you’re not familiar with how banks can fail quickly because of a lack of depositor confidence, here’s how Alex And Natasha Explained it in terms of SVB:

Many investors are afraid to turn to the bank – which means that enough startups will withdraw their capital into SVBs, a situation in which financial institutions may find themselves in reverse in terms of deposits versus demand for those funds. (Bank runs are often ironic in that they can become self-fulfilling prophecies.)

One investor also told TechCrunch that many VCs are advising startups to diversify their assets across multiple banks and typically keep no more than $250,000 in SVB checking accounts. (NB: $250,000 is the maximum that is insured by the FDIC, meaning those funds will have solid external protections.)

SVB’s stock started in the basement on Friday as the apprehension of a bank run turned into reality. Trading of the bank’s shares was halted, reportedly because SVB was frantically trying to sell its assets so it would not close.

SVB has also asked its employees to work from home till it takes further steps.

what really happened?

To better understand how things played out, Alex digs deeper into what caused the bank to go from a relatively stable business to a going concern in just five days:

The post-COVID-19 venture boom was partly based on money being incredibly cheap: global interest rates were below negative, so there were few places to put capital to work. This has led to large venture capital funds investing a mountain of money in startups, which has pooled money in SVB which, until recently, was the prime destination for startups’ banking needs. However, as the FT notes, the massive increase in deposits at SVB – never a bad thing in a bank – eclipsed the bank’s loan capital capacity. This meant that he had a lot of cash lying around at a time when it was useless to hold cash to see the returns. The bank invested all that money, at low rates, in things like US Treasuries (page 6 of its mid-March update presentation). Later, in an effort to reduce inflation, the US Federal Reserve raised interest rates, venture capital investment slowed and the value of low-yielding assets fell as the cost of money rose (the opposite of bond yield prices). so as rates went up, the value of SVB-held assets went down). The bank decided to sell its available for sale (AFS) portfolio at a loss (rate up, value down) so that it could reinvest that capital in higher-yielding assets. SVB wrote to investors that it was “taking these actions because we expect continued high interest rates, pressure on the public and private markets, and increased cash levels from our customers as they invest in their businesses.” invest in.” What did SVB expect after all was said and done? An estimated $450 million increase in its annual net interest income (NII). Initially, TechCrunch+ thought the bank’s shares were selling off because investors were unhappy with the $1.8 billion charge it took when selling its AFS portfolio, as well as SVB’s plan to sell a few billion shares, which would dilute existing shareholder ownership. Instead, venture and startup markets fret. Why was SVB selling so much stock? Taking such a huge charge? Taking such drastic steps? Worry gave rise to fear, which in turn led to panic. Basically everyone was worried that everyone else would panic and pull out their capital, so they wanted to do it first. Any risk of capital loss was unacceptable, so people raced not to be last. It later became apparent that SVB had more unrealized losses on its balance sheet than its peers, which created a crack in its foundation that would eventually pit the bank when it combined with actions taken prior to the bank run. Tried to settle the matter.

We were in shock at SVB’s rapid demise: “Why did the bank go from saying it was well capitalized yesterday to what appears to be such a quick fire sale? Our guess at this point, pending further information, is that That panic over the bank’s health had led to such an outflow of deposits that it actually got into trouble. Banking depends on trust, and suddenly SVB didn’t have a market.”

A few hours later, the second shoe dropped: The FDIC announced that it had taken over SVB, that the bank had failed and that it would resume operations on Monday, March 13, with regulators in charge.

“Among the many steps the FDIC is taking, the top priority appears to be providing customers with access to their deposits,” Natasha wrote. “The same memo states that all insured depositors will have ‘full access’ to insured deposits as of the morning of Monday, March 13, and that official checks ‘will continue to clear.’ The memo said an advanced dividend would be paid to uninsured depositors within the next week, and that future dividends could be created as the FDIC sells SVB’s assets.

The news that SVB had failed, becoming the second largest US bank to do so, ruined the weekend for many startup founders and venture capitalists. How were the startups paying for the goods while the glitch was being resolved?

It’s important to remember that at this point no one really knew how things would play out. Startups and investors had little visibility into the FDIC’s plans for SVBs, and it was not told how long companies with money locked up in the bank would have to go without cash.

Alex finds out what was at stake:

A good number of startups are sitting on huge funds raised late in the last startup boom. They were depending on that money to tide over the current recession. What happens to those companies if they bank in SVB and they do not have that capital available? The later stage a startup is, the greater its cash needs, and the more difficult it is to cover them with direct cash.

Some of these cash-rich unicorns are also very illiquid when it comes to their valuations. Who is really going to cash them at par with their previous round? Maybe none.

Just messed up. This crisis is going to hit a host of startups either quickly or simply by adding enough operational friction to bring them to their knees.

(un)fixed currency position

As if the closure of Silvergate Bank wasn’t already a bad enough week for the crypto industry, on Friday it became known that one stablecoin in particular, USDC, held some of its backing capital in SVB, which That was probably illiquid for now. At least several days. USDC is the second largest stablecoin by market capitalization.

USDC issuer Circle said the next day that “3.3 billion of the ~$40 billion of USDC reserves remains in SVB,” or about a third of the cash the company said it had in January. Following that announcement, USDC traded at 88 cents, just short of its $1 target.

Meanwhile, Signature Bank, a key lender to the crypto ecosystem, became the second victim of the banking crisis on Monday after regulators shut down the bank, saying it “poses a systemic risk and threatens the US banking system.” could.” About 30% of the bank’s deposits come from the crypto industry.

“The closure of Signature Bank serves as a one-two punch as concerns grow over the vulnerability of any bank exposed to the crypto industry,” Francesco Melpignano, CEO of Kadena Echo, told TechCrunch+. “With only a handful of publicly traded banks having ties to the crypto space, many investors are scrambling to bet against them.”

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