The impact of the collapse of California-based Silicon Valley Bank on Friday reverberated all weekend.
On Sunday night, in a move made to ensure confidence in the U.S. banking system and prevent panic Monday, the Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and Federal Deposit Insurance Corporation Chairman Martin Gruenberg said all customers in the now famously failed Silicon Valley Bank will be made whole and have access to their money Monday morning.
The somewhat unprecedented move – which Yellen specifically had said would not happen earlier in the day Sunday – is meant to ensure the companies connected to SVB (almost exclusively startups in the tech sector) would have access to the money they need to pay their bills (payroll, rent, vendors) and continue their day-to-day operations.
Many SVB customers were based in New Jersey – which is one of the reasons the collapse has had such a major impact here.
Confused? That’s OK. ROI-NJ spoke to a number of officials in government, economic development, tech, private equity and banking this weekend. Here’s a Q&A that combines all of those insights in an attempt to explain the situation:
Does the move by the FDIC mean the crisis is over?
Not necessarily. The move by the feds came after New York regulators announced Sunday that Signature Bank, a regional bank that had a strong connection to real estate and had made moves to position itself with cryptocurrency – also had failed and its customers would be made whole by federal backing.
It’s unclear if other banks will collapse this week.
Is this a signal of a collapse of the banking industry?
No. Not even close. Far from it.
This is not a solvency crisis as was seen in 2008. This is not a case of bad loans. And, unlike those who invested in FTX, the money is not lost forever. It’s still there. In full. It’s just a liquidity crisis. Too many depositors demand their cash at one time and the bank could not handle it. What caused depositors to demand their cash is the bigger issue.
How is N.J. impacted?
On Friday, after regulators had taken over SVB, officials from TechUnited:NJ and the N.J. Economic Development Authority took an unscientific survey that found that hundreds of companies in the state’s innovation and startup ecosystem were connected to Silicon Valley Bank, which had become the bank of choice for that community.
Many of the companies were under the $250,000 FDIC threshold that ensured their deposits were safe and insured. An undetermined number had assets above that level – some multiple millions over that level – and were facing a crisis.
For now, those companies appear to be in good shape – or, at least, have access to their deposits.
What was N.J. prepared to do?
Late Sunday afternoon, Gov. Phil Murphy announced the EDA was launching (or re-launching) three initiatives to ensure the companies with assets above the $250,000 mark would have funds available to continue their day-to-day operations. More specifically:
· The $5 million N.J. Entrepreneur Support program, which offers a guarantee to support repayment of an investor loan advanced for working capital purposes and is designed to encourage investors to support businesses within their portfolios during this liquidity crisis when investor support is particularly crucial.
· The $20 million Angel Match program, which is intended to help early-stage businesses bridge funding gaps as they scale their operations and refine their products. The program, which will match up to $500,000 in direct investments. Among other things, the funding will extend the capital support from investors during this time of uncertain banking resources.
· The $10 million Emergency Liquidity program, which the EDA is set to discuss Wednesday. The program, intended for N.J.-based companies with over $250,000 in deposits at SVB, would provide a loan of up to $500,000 to provide short-term financing options for at most 12 months.
Are these EDA programs still needed?
As with so much else, it still is unclear.
On Sunday night, EDA officials said they would need to see how investors react Monday before determining next steps – saying it would be premature to assume the move by the feds would completely solve the issue.
This much is clear: The state deserves credit for stepping in quickly – acting even before the Feds.
What are next steps?
Federal regulators will look to sell off the assets of SVB as soon as possible. (The government held an auction over the weekend). Late Sunday night, it was announced that HSBC will buy the British subsidiary of Silicon Valley Bank, the Bank of England said in a statement.
The hope is that all of the bank’s assets, which will be divided up, can be sold to others. This, however, takes time – even in a rushed environment. The inability to sell more of the assets this weekend partially led to the Fed’s actions Sunday night.
What are the best-case and worst-case scenarios Monday morning?
The best case is that these moves eliminate the panic that caused companies to make a run on SVB last week – and potentially could lead to runs on other banks today and this week.
The worst case is that wild speculation leads to more panic today. As one insider put it, if just one bank fails to open today – even if it because someone forget the key – the news could be spread instantly on social media, causing chaos.
Speaking of chaos, how did all of this happen again?
Silicon Valley Bank, the No. 1 bank for the tech and venture capital sector, announced Thursday that it had sold some assets – at a loss – to ensure it had enough liquidity to cover accounts.
The announcement, which was delivered poorly, was meant to calm those with deposits. It did the opposite. A panic ensued, causing a run on the bank, which could not handle the withdraw requests. By Friday, it had failed and was taken over by the federal government.
Give us a big takeaway?
Among other things: Don’t put all your eggs in one basket – or all your deposits in one bank. Companies need to be mindful of the FDIC’s $250,000 guarantee limit.
It’s something a lot of founders and CEO got a reality check on this weekend.