The basic question is: Is it sensible for a single bank to dominate an industry?
Silicon Valley Bank, which collapsed on March 10 after suffering a bank run, was—as its name suggests—the go-to bank for tech startups. Its website boasted that it banked 44 percent of venture-backed firms that had gone public, which was in part because it was also the bank for more than 2,500 venture-capital firms. It understood founders’ needs; it made introductions. “You couldn’t go to a party in the Bay Area that wasn’t sponsored by Silicon Valley Bank,” said Danish Nagda, the founder of a health startup, Rezilient, on a Twitter Space the day after the collapse.
Right now, you might be inclined to say that this concentration was a bad thing. The short version of why SVB failed is that it relied too much on a single class of depositor, namely startups.
The slightly less short version is that it relied too much on startups and made a poor bet on interest rates. As rates rose last year, startups started getting less venture funding, so they started withdrawing more cash and depositing less. In addition, because startups usually don’t take out loans, SVB wasn’t doing much lending like a normal bank. Instead it had invested customer funds heavily in fixed-rate securities, which become less valuable when interest rates go up. So when the startups began demanding their cash, the bank had to sell these securities at a loss. When you’re losing money to stay afloat, people eventually notice; they try to pull all their money out before you go under, and so you go under.
(If you want the really not-at-all short version, Bloomberg’s inimitable Matt Levine has his typically excellent explanation.)
This was a potentially existential problem for many startups, since federal deposit insurance covers only the first $250,000 of a deposit. For any company with more than a handful of employees, that doesn’t pay the bills for very long. Fortunately, the US government announced yesterday that depositors will regain access to all their funds, thanks to dues paid by member banks to the Federal Deposit Insurance Corporation. But although catastrophe may have been avoided, the shock to the startup ecosystem will have knock-on effects across startups, investors, and other financial institutions, perhaps beyond the tech industry. And as in past financial crises, troubles at one bank may lead to the discovery of more at others.
Concentrating startup business in one bank does, then, look bad on its face. But could this crisis have been avoided? Quite possibly, and right now there is a lot of finger-pointing about that.
SVB could have hedged for interest-rate rises and not put so much of its money into fixed-rate securities. Government regulators could have paid closer attention to the bank’s mounting risks and told it to diversify its portfolio. (There’s a certain schadenfreude in seeing the anti-regulation tech community brought low by insufficient regulation.) Once SVB did start having problems, it could have done a better job of communicating, and reassuring depositors instead of panicking them. Peter Thiel’s high-profile Founders Fund could have not contributed to the stampede by pulling all its money out of SVB. And so on.
In other words, there is a world in which people took better decisions and SVB continued to chug along quite happily. The question is: Is that the world we want?
One view is that it isn’t, and that this collapse, in addition to being a salutary lesson for the tech industry, is an opportunity for the sector to finally break out of its cozy silos and learn to talk to the wider financial system. At some level, SVB collapsed for the same reason that female and Black and Latino founders still struggle to get VC funding, or that shaggy-haired kids manage to sweet-talk people into giving them billions for crypto Ponzi schemes: The tech industry and its financing are about relationships.
There’s surely something archaic, moreover, about tech-specific banking. Tech is everywhere, and if a country like the US wants to remain competitive in the global innovation race, shouldn’t every major bank learn the needs of startups and VCs and build its own tech arm, with branches in all of the country’s main technology hubs?
Something like this could start to happen in the wake of SVB’s failure. Anything I write about how this saga ends is likely to be out of date even before it’s published, but one plausible scenario is that a Wall Street bank buys up SVB, acquiring both its assets and its depositors—the kind of thing that often happens in a bank failure. That would help prevent the startup world from screeching to a halt, and the buyer would gain access to a whole new class of customers. Then maybe other big banks, not to be left out, might start wooing tech founders and investors to their taupe-colored lobbies.
The alternative view, however, is that for all its clubbiness, the Silicon Valley Bank model is actually good for innovation. The problem with the major banks is that “they have one-size-fits-all financial services,” says Robert Hockett, a professor at Cornell Law School. A specialized bank, by contrast, can be thought of “as a kind of credit union for the tech industry,” whose members borrow from and lend to each other, and understand each others’ needs better. SVB was more likely to offer mortgages to startup founders, with their unpredictable income streams, or give them a grace period when cash was short.
Josh Wolfe, of VC firm Lux Capital—one of the 300-plus investment firms that have signed a promise to work with SVB if it is rescued—points out that it’s not only the tech sector that has specialized banking. “Agriculture and farmers have this, real estate as well as transportation and logistics have preferred partners too,” he says. Regional banks that specialize in certain industries “serve a purpose not just for the local companies or industries but also for diffusing risk,” he adds—namely, the risk of banking becoming too concentrated in the hands of a few major players.
If a bigger bank does take over SVB, then, one major question is whether it will keep the name, the branches, and the culture, effectively allowing SVB to continue functioning as its subsidiary, or try to absorb the bank into its larger operations, so that a Citibank or a Chase of Silicon Valley looks just like the ones anywhere else, and startups and venture capitalists can walk into any of them and expect the same service.
The latter might sound like a lovely idea in principle: If you were a giant and somewhat stuffy bank, wouldn’t you leap at the chance to integrate an exciting new sector of the economy into your core business? But in practice, embracing the golden goose too tightly might turn out to be the thing that kills it.
