What Companies Will Be Affected by SVB Failure?

In fact, for the past 40 years, Silicon Valley Bank has been one of the most important institutions to provide such funding. Whether it’s a brand-new startup or a more experienced venture, SVB has been there to lend a helping hand.

Moreover, the firm’s central role in guiding some of the biggest names to come out of the startup scene had secured the bank unrivaled expertise in what was, at first, a very misunderstood sector. The company perfectly structured its financial products to suit the needs of its clientele and went on to gain the trust of many in the industry.

But that reputation came tumbling down earlier in March when a run on the bank led to its assets being seized by US regulators.

Although much of the analysis after SVB’s collapse has centered around whether its demise would affect the broader banking world and lead to a possible global crisis, there’s been less focus on the companies that used its facilities and how they would fare in the immediate aftermath of its demise.

So, let’s look at those businesses and see what challenges might lie ahead in the coming weeks.

Were SIVB’s Customers More At Risk?

One of the unique selling points of Silicon Valley’s banking operation was its willingness to lend to companies with little-to-no revenue. This meant it was a popular option for firms who were just starting out, as well as venture capitalist (VC) enterprises who were managing their newly-minted concerns.

While this worked OK in an environment of low-interest rates and cheap money – which was the case for most of SVB’s existence – it didn’t translate so well to today’s macroeconomic conditions. Smaller companies have seen their profit potential wiped away the last year through spiraling inflation, with rising interest rates also making it harder to obtain additional funding.

Likewise, this dynamic contributed to the bank’s depositors withdrawing their assets and kicking off the chain reaction that led to SVB’s downfall. The need for immediate cash was the overriding concern for these businesses, which had payroll and other obligations to be met.

And that’s why many of Silicon Valley Bank’s customers are so vulnerable. Those obligations haven’t gone away – and might become more onerous if recessionary pressures worsen.

The Wider Ecosystem Is Under Threat

As the focal point of Silicon Valley’s funding universe, SVB’s disappearance will significantly affect many businesses. Further to its essential banking functions, the organization has been critical to the fortunes of both startups and billion-dollar companies alike.

For example, Etsy, the American e-commerce company used by many craft and vintage item creators, experienced delays in processing transactions in the days after SVB’s problems came to light. Furthermore, streaming service Roku revealed that nearly a quarter of its total cash reserves were held with the Silicon Valley institution.

However, it’s not just the current clients of SVB that have been affected. Many VCs would direct their prospective investment projects to the bank, knowing the establishment would take good care of their charges.

Unfortunately, all the expertise SIVB has built up over the years is at risk of being lost, with few alternatives ready to step into the breach. Hopefully, the new CEO of the Silicon Valley Bridge Bank can find a way to preserve the company’s know-how, keeping alive the prowess it honed navigating the space for future generations to come.

Could Contagion Bring Down Banking System?

The reaction of the Federal Reserve and other government agencies to the failure of SVB has been widely praised in most circles. The Federal Deposit Insurance Corporation has instituted a plan to help banks guarantee customers’ funds for at least a year, and has raised the ceiling on how much of those funds are protected.

However, the complete picture doesn’t appear so reassuring if you step back momentarily. The Biden administration has effectively nationalized the bond market to save, ostensibly, one financial outfit, with the less formal reason obviously being to stave off the collapse of the banking system itself.

But is this prudent in the long run? Bonds are used as a measure of sentiment at any given moment to inform and hedge against decision-making on far-off events and developments – and uncoupling this association brings more uncertainty, not less. Indeed, the FDIC has said that institutions holding US Treasuries, mortgage-backed securities, and agency debt will be “valued at par” for the purposes of its new Bank Term Funding Program.

Rather than assuaging fears of further contagion, the authorities have put off the matter until another day. However, the market won’t be fooled by this – at least not for long.

Take the case of Credit Suisse; the banking giant had to be rescued with the infusion of $44 billion in emergency funds after the stock tanked to its lowest value ever in the wake of the SVB debacle. And yet, with the most unmistakable warning signs flashing in plain sight, Treasury Secretary Janet Yellen believes the system is still “sound.“

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