The collapse of Silicon Valley Bank (SVB) has brought to light some of the risks associated with any business’s reliance on a single financial institution. This incident has also raised concerns about the level of risk that some banks take and the potential impact on the broader economy. While the SVB collapse was shocking, it wasn’t inevitable. In this post, we’ll examine the reasons behind SVB’s collapse and the lessons that can be learned from this experience.
The Tech/Startup Industry’s Reliance on Silicon Valley Bank
One of the key issues that led to SVB’s collapse was the tech/startup industry’s heavy reliance on this one bank. SVB had established itself as the go-to bank for many high-growth tech companies, providing loans, lines of credit, and other financial services that helped these companies scale. However, this also meant that the bank was heavily exposed to the risks associated with the tech/startup industry.
As the tech/startup industry grew, so did the level of risk that SVB held. Even large, established tech companies that should have had the resources to conduct thorough due diligence did not have a backup bank. This meant that when SVB collapsed, these companies were left scrambling to find alternative banking services, illustrating that bigger businesses don’t always have the best business practices.
The Controversial “Bailout”
SVB’s collapse was a major blow to the tech/startup industry, which makes up a significant portion of the United States’ GDP. In response, the government stepped in to provide a bailout, which helped to shore up the sector and prevent further damage to the economy.
However, the bailout was controversial. Many people were unhappy that their tax dollars were being used to prop up a bank that they believed should have been better managed. Moreover, some businesses with deposits over $250,000 were still being made whole, despite exceeding the FDIC threshold, setting a concerning precedent.
Silicon Valley Bank’s Risk Management Failures
One of the key factors that led to SVB’s collapse was the bank’s failure to adequately manage its risks. SVB served the high-risk startup industry, where companies may have a harder time raising capital in an economic downturn. SVB should have followed the example of larger banks that were putting safeguards in place knowing that interest rate hikes were likely climbing.
SVB assumed that the rate of cash usage would be in line with historical levels. However, as inflation got worse, the bank’s cash utilization rate shot up, and the bank was caught off guard. It had to cash in long-term treasuries at a loss, which was irresponsible and put the bank at greater risk. That information was only disclosed as a footnote in the bank’s financial reports.
The Impact on Fintech Businesses and Lenders
When SVB collapsed, Valmar Merchant Services received an influx of requests for information. Current customers wanted to make sure they had adequate bank redundancy in place, those with money tied up in SVB needed help transferring their funds, and new customers who had trouble establishing banking relationships because of the high-risk nature of their businesses inquired about creating redundancy.
This experience highlights the importance of bank redundancy for all businesses. Having a backup bank can help to mitigate the risks associated with relying on a single financial institution. While it can be hard for high-risk banks to find one bank willing to do business with you – let alone two – it’s not enough to be comfortable processing all of your transactions with the first financial institution that will take you on. You must have a second banking option.
The collapse of Silicon Valley Bank provides several valuable lessons for businesses and the broader financial industry.
First, businesses should not put blind faith in the banking system. Relying on a single bank for all financial transactions is a significant risk that must be avoided. Never allow your business to operate with a single point of failure!
Second, businesses should take a more proactive approach to the due diligence process when considering a relationship with a banking partner.
Finally, if you operate a high-risk business, it’s very important that you work with a payment processor who is not only friendly to your sector but also well-versed in the unique hurdles you face.