The US Treasury has decided: all depositors at Silicon Valley Bank will get their money back. Washington is thus sparing a crisis with possibly international ramifications for a technology sector already battered by the stock market volatility of the past year. But all is not settled yet, far from it.
In fact, the impact of this bankruptcy could be felt in the long term, observes the senior partner and co-founder of the Montreal fund Real Ventures John Stokes. “There is suddenly a level of uncertainty about the risk of doing business exclusively with one bank, which was not there two weeks ago,” he said in an interview with the Duty. “No doubt that many investors or entrepreneurs will want to do business with more than one bank in the future. »
The worst of the crisis was avoided late Monday morning as the Federal Reserve (Fed) and the US Treasury made liquidity available. The day before, they had jointly announced that they were guarantors of all the sums that the depositors of the Silicon Valley Bank will want to recover. Both institutions are going a step further and will release funds to help other undercapitalized financial institutions cover their customers’ withdrawal requests if they are unable to do so.
In Washington, as on Wall Street in New York or even here in Quebec, we feared until then a snowball effect where a large number of companies would present themselves at the same time at the counter to withdraw all their marbles. Despite the legislative framework that obliges them to keep a minimum sum supposed to cover such situations, the banks do not have on hand all the sums entrusted to them over time.
“The American banking system remains resilient, because it rests on solid foundations”, assured by press release the Fed and the American Treasury. “In large part, it is thanks to a reform carried out after the financial crisis [de 2008] which imposed stricter safeguards on banks. »
If the banking system has resisted, confidence in this system has probably lost its luster, nuance John Stokes. “After the overvaluation of start-up in recent years, this is another event that has eroded the confidence we can have in the system. And the less trust there is, the harder it is for the system to work well. »
Credit still pending
Despite the protections guaranteed over the weekend by the financial authorities of the United States and Canada which protected up to US$250,000 for customers of Silicon Valley Bank, also known by the acronym SVB, fears were big, until the Treasury and the Fed announced that a sudden lack of liquidity was tripping up more than one major tech company. Homegrown names like DoorDash, DocuSign and Roku are among its nearly 40,000 customers, mostly tech companies.
Canadian companies like payment platform Shopify and financial service Borrowell are also customers of Silicon Valley Bank.
On Friday, the CEO of the highly influential investment firm Y Combinator, Garry Tan, called the Silicon Valley Bank bankruptcy an event “of the caliber of a mass extinction” for the start-up ecosystem. North Americans. Ironically, Mr. Tan and his senior counterparts at other venture capital firms with a strong presence in California — the epicenter of North American tech — have greatly accelerated the institution’s downfall by encouraging the many companies in which they are involved to withdraw their dormant money in their bank account at the SVB.
They will still be able to recover all their marbles. Those who, on the contrary, were subsisting on a line of credit from the bank — and who therefore do not have the capital necessary to get through the next few weeks — have not gotten out of trouble, since their situation is not protected by the US government. The Silicon Valley Bank, for its part, will be liquidated to the highest bidder as soon as possible by the financial authority, which has acquired it while the situation is resolved.
A bankruptcy
At US$175 billion, the Silicon Valley Bank failure is the second largest bank failure in the United States after that of Washington Mutual in September 2008. The Californian bank is very present in the American technology sector.
A rapid rise in interest rates and a venture capital investment market chilled by the economic volatility of recent months have caused several technology companies of all sizes to dip into their financial reserves with the SVB at the same time to pay bills that their income is not enough to cover.
Liquidity proved to be insufficient to satisfy all the requests received by the Silicon Valley bank, hence the bankruptcy of the Californian bank.