What Silicon Valley Bank’s Collapse Could Mean for Private Money
In a Global Economy, Every Financial “Ripple” Matters
By Carole VanSickle Ellis
In early March 2023, Silicon Valley Bank (SVB), a major bank in Silicon Valley that had made its name catering to venture-backed tech startups, was taken over by federal regulators. The SVB collapse was the start of the second-biggest bank failure in history and was instigated by a run on deposits after the institution announced it had sold roughly $21 billion in securities and subsequently sustained losses totaling nearly $2 billion in the first quarter of 2023.
While $2 billion might seem insignificant compared to the bank’s $209 billion total assets as of December 31, 2022, the sale and losses sparked trepidation among investors and depositors at SVB, resulting in customer withdrawals of $42 billion, about a quarter of the bank’s entire deposits, in a single day. At close of business the next day, Thursday, March 9, 2023, SVB’s stock had fallen 60%, shareholders had lost more than $80 billion, and clients were reporting delays in requested transfers to other institutions.
Although some analysts said in retrospect there were signs of potential trouble at the institution, public appearances essentially indicated that the bank was in sound financial condition Wednesday, March 8, 2023, and insolvent the following day.
The Fallout
Not surprisingly, SVB’s struggles affected the entire banking and finance sector, with Bank of America, Wells Fargo, Citigroup, and JPMorgan Chase all losing substantially before stabilizing and then gaining ground as customers and clients at smaller banks pulled assets from those companies to deposit them at larger institutions. This shift was fueled in part by the perception that larger banks would be at less risk of failure than “smaller” ones like SVB, which was the 16th-largest bank in the country when measured by deposits, and in the interest of diversifying assets so that larger volumes of capital would be insured by FDIC coverage, which is typically limited to $250,000.
Many of SVB’s clients had large amounts of capital that were uninsured at SVB; in fact, at the end of 2022, SVB held $150 billion in uninsured assets. Regional bank stocks crashed nearly across-the-board as customers reacted to fears that smaller banks might “run out of money” in the event of a run.
Interestingly, “neo-banks,” also sometimes referred to as “challenger banks,” benefited from an influx of funds in the wake of the SVB meltdown. As start-ups raced to diversify their holdings and rescue what they could from the uncertain fallout, neo-bank Mercury snagged 20% of new-account openings over the weekend following SVB’s turmoil. Neo-banks are fintech platforms that offer a variety of options to streamline mobile and online banking, including apps, software, and other web-based technologies. They tend to specialize in one financial product, such as checking accounts or savings accounts, and are often viewed as digital disruptors because although they may partner with a “megabank” to insure deposits and products, their entry into the financial space has been compared to Airbnb’s effects on the hospitality industry or Uber’s impact on transportation.
Will the Ripples Reach the Private Money Sector?
So far, most private lenders and private loan brokers are cautiously waiting to see what fallout, if any, will reach the private money sector in the wake of SVB’s meltdown, the subsequent collapse of Signature Bank, the federal bailout of SVB customers, and a concerted effort from mega-banks to shore up confidence in spiraling First Republic Bank by making $5 billion in deposits to demonstrate faith in the San Francisco-based operation.
“It is interesting how history repeats itself,” observed Mike Tedesco, CEO of Appraisal Nation, a national appraisal-management company based in Raleigh, North Carolina. Tedesco noted that after the housing crash of the mid-2000s, federal legislators passed tighter regulations on lending to prevent a repeat event. However, he said if it appears the fallout from SVB is subsiding, regulators might elect to back off, particularly given current Federal Reserve policies that necessitate ongoing interest hikes. “If [policy makers] feel they have nipped this in the bud, then they may wait [on stricter legislation], but if a few more banks fail, it is absolutely coming,” he said.
Ben Fertig, president at business-purpose lender Constructive Capital, said that from his perspective, the bigger issue with the entire SVB saga is that it has the potential to change how lenders, borrowers, banks, and customers, think about credit, lending, and finance. “Even though the depositors were [ultimately] protected, the equity structure for banks could dramatically change. As new stakeholders make decisions, the credit philosophy of those [bailed-out] banks could be much different than it was before. If this extends outward, to regional banks, for example, you could see certain types of financing that could become harder to come by.” Fertig noted that this could have a temporary, positive effect on private lenders able to meet financing needs previously handled mainly by conventional bank loans, but said in the long run the change would be “net negative” for the financing sector. “I think the credit availability is the most important,” he said.
Lily Fang, dean of research and professor of finance at INSEAD’s Fontainebleau campus, warned that the impact of the SVB collapse on the tech ecosystem has yet to fully manifest. In a breakdown of events published on March 23, 2023, Fang wrote, “SVB was an important player in the tech ecosystem and the main banker for tech start-ups — taking deposits and making loans. We have already been in a tech winter for a year, and the unravelling of SVB will simply deepen that winter.”
SVB has placed the interconnectivity of the global economy on display in a new light, with the shock waves of what should have been a relatively minor misstep affecting just one institution rippling outward to maim and cripple other international players, like Swiss lender Credit Suisse. While Credit Suisse was already floundering thanks to years of scandals, management changes, and financial losses, the final sale of the bank to competitor UBS was spurred by fears spreading through the global banking system in March 2023.
Ultimately, the flexibility of the private money industry will likely enable it to withstand headwinds that other financial institutions may find wildly problematic. As Tedesco put it, “We have never been more connected globally than we are today, and we have to be more mindful and cautious of who we lend to and how we lend than we ever have before.
Side Bar
How the Silicon Valley Bank Collapse Could Affect Real Estate
For investors who lived through the housing crash and financial meltdown of the mid-2000s, the Silicon Valley Bank (SVB) collapse may feel a little too familiar for comfort. However, it is highly unlikely that 2023 will mirror 2008. Of course, no investment — not even real estate — is risk-free. The housing market is experiencing its own unique combination of pressures in 2023 that could affect its stability in the coming months. Those pressures include continued demand for new housing due to massive household formation during the COVID-19 pandemic, highly regionalized market swings, and a lack of affordable (costing roughly one-third of local median earnings) existing residential supply (rentals or owner-occupied) to meet the needs of new households.
For a brief period of time before the last Federal Reserve meeting, some analysts thought that SVB’s collapse might bring a slight and temporary respite from rising mortgage rates. Had the Fed not raised interest rates in an attempt to calm financial stress elsewhere, would-be homeowners might have had a chance to snap up properties before interest rates sent monthly mortgage rates climbing again. When the Fed elected to raise rates a quarter of a point later in March, that hope was dashed. However, leaving interest rates the same (versus lowering them) would not likely have dramatically improved the housing affordability crisis anyway.
