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The US Treasury Department and the Federal Reserve said they will be able to respond to any liquidity pressure from Silicon Valley clients. “Up to $25 billion will be made available from the Exchange Rate Stabilization Fund for support,” Treasury Secretary Janet Yellen said. Efforts are being made to avoid a repeat of the 2008 financial crisis at all costs.
By Dominique Baillard
The Silicon Valley Bank bankruptcy has rocked the tech industry. The collapse of this Californian bank dedicated to innovation could have caused a cascade of bankruptcies in the sector. But on the afternoon of March 12, the highest US authorities announced that all deposits would finally be protected, putting an end to the nightmare of the bank’s 35,000 clients, mostly start-up founders.
Since Friday, they have not been able to withdraw a single dollar from their bank accounts. They need money urgently, since this week they have to pay their salaries for mid-March. Many of them feared losing much more: even the entire capital they had raised to finance their development and had unwisely left in their favorite bank accounts.
The venture capital funds that support them are also clients of the bank, so there is a certain lightness in the management of capital flows. But the protection of all deposits announced on March 12 by Janet Yellen has reassured clients.
Why did startups trust this bank so much?
Because it was created for them forty years ago. Silicon Valley Bank was willing to take the risk that other conventional banks were not willing to take. It enabled thousands of start-ups to get funding and become phenomenal success stories.
Spotify, the streaming platform, and Beyond Meat, one of the pioneers in meat substitutes, count among its loyal customers. Half of new American companies have an account with the SVB. The bank is, therefore, a key player in the financing of innovation in the United States. It is also in the United Kingdom, where it has been operating for 18 years.
How will the technology be financed?
A bank can take over all the activities and customers of the SVB that has gone up for auction. But this savior, if he declares himself, will he be willing to take the same risks? Another unanswered question is whether other innovation banks will suffer similar problems as the SVB.
On March 12, Signature Bank was declared insolvent and placed under the control of the Federal Deposit Guarantee Agency. These issues undermine confidence and, therefore, the entire financing structure. A new challenge after a calamitous year. In 2022, investments for start-ups fell 30% in a sector where money previously flowed freely.
Tech chiefs pleaded with the Administration for help
And the administration they are so fond of berating for their alleged regulatory overreach is answering their call. Treasury Secretary Janet Yellen yesterday ruled out a public bailout of the bank. But she at night she announced that all deposits of Silicon Valley Bank and Signature Bank clients would be guaranteed. A decision made at the top of the Government, in consultation with Joe Biden.
In Washington, the top priority is not so much technology but avoiding a repeat of the 2008 financial crisis. It was necessary at all costs to reassure customers and all economic agents before the reopening of the stock markets.
The Federal Deposit Guarantee Agency is only authorized to reimburse insured accounts, up to a maximum of $250,000. This only affects 4% of SVB deposits. So the agency will go far beyond its powers to save technology, banks and perhaps the world economy from collapse.
