Here are some questions and answers tied to the evolving news about troubles at Silicon Valley Bank and Signature Bank and what it may mean to the tech industry in Wisconsin.
What is Silicon Valley Bank? It is a niche bank, based in California, that focuses on banking venture capital-backed and other private equity businesses. It lends to VC-backed companies between rounds of VC raises. At last measure before troubles emerged, it was the 16th largest bank in the United States with assets of about $210 billion. It has resumed its deposit and lending services under FDIC control and is now operating as Silicon Valley Bridge Bank.
What is Signature Bank? Like SVB, Signature had a clientele concentrated in the tech sector, especially cryptocurrency, and the securities on its balance sheet had eroded as interest rates rose. It is based in New York and showed assets of about $110 billion in total assets as of Dec. 31.
Does either bank have a presence in Wisconsin? Some presence, but not a great deal. Neither Silicon Valley Bank nor Signature Bank have offices in Wisconsin; the closest are in the Chicago area. However, some venture-backed companies in Wisconsin had deposits with the banks and there have been some venture-debt deals in Wisconsin. A Tech Council survey of selected major funds and angel networks did not uncover a large number in either category. However, Wisconsin-based gener8tor — which works in many states — says it had multiple portfolio companies with SVB accounts.
Why were SVB and Signature deposit customers so nervous? The venture-backed companies that do business with either bank are sometimes large depositors, meaning they held far more money in those banks than what’s protected by the $250,000 FDIC insurance limit. The U.S. government announced Sunday it is deploying emergency measures to shore up the banking system and to backstop deposits at both banks. All deposit accounts at SVB and Signature will be guaranteed, according to a joint statement released by the Federal Reserve, the Department of the Treasury and FDIC.
How did these bank problems emerge? The current situation started because SVB’s deposits were reinvested in held-to-maturity bonds, which fell in value, thus generating a loss to the bank. Deposits are booked as a liability to a bank because they’re not the bank’s money; they must be returned when the customer wants. There were other contributing factors, as well, but it boiled down to a “run” on deposit withdrawals that exceeded liquidity.
Are there any bad loans involved? Not in any systemic way that is known. In fact, the soundness of those loans should make the sales process somewhat better as the FDIC undertakes auctions. The $74 million loan portfolio at SVB, for example, might sell at a discount but perhaps not a very steep one.
Could this extend to other banks? Possibly, as the Federal Reserve is reportedly rethinking how it oversees midsize banks. But further fallout should most likely be contained to banks that have a similar profile to SVB and Signature — and there aren’t many like them. Banks that meet or exceed minimal capital requirements; have a strong liquidity position; have a loan portfolio that performs well; and have multiple lines of business face no real risks. It’s not 2008 all over again… but some clean-up remains.
Are there larger potential problems for young companies in the tech sector? Of course. There may be less access to venture debt loans for a while. Those loans are often key to “bridging” a company’s operations between venture capital equity rounds. More private lenders may see demand for venture debt from venture-backed firms, but are they experienced in doing so? Venture capital was already hard to raise in 2023 and it won’t get any easier or the process less lengthy.
What should young companies do to safeguard themselves? It may depend on the size of the company, but some basic checklists make sense. You don’t have to have been a customer of SVB or Signature to take some reasonable precautions. Make sure liabilities are properly assessed — vendor payments, payrolls, invoices — as well as assets. Is a line of credit in place? If a company doesn’t have in-house counsel or financial expertise, it should consider consulting with those kinds of outside experts. Or perhaps both approaches if you have doubts. (Please see our newsroom for potential sources of advice.)
Are there long-term solutions? During the Trump administration, large bank “stress tests” on assets instituted under the Dodd-Frank bill were reduced. Congress may move to reinstitute. There are also questions as to whether the Fed’s interest rate hikes are reducing inflation, as Intended, or the economy is rejecting the medicine. General federal spending levels and the debt ceiling debate has also been cited by some. In short, there may not be one simple remedy.
- Source: Wisconsin Technology Council staff and advisors