Treasury Today – March, 2023
The collapse of Silicon Valley Bank (SVB) has been a reminder about the importance of diversification, and not centralising cash. For some SVB customers, however, the old adage of not putting all your eggs in one basket hasn’t been helpful. Meanwhile fears of systemic risk spike as the sharp sell-off in European banking stocks shows the crisis is not contained.
On the edge of a crisis, ‘don’t panic’ is probably the least reassuring thing to hear. “The last thing we need you to do is panic,” were the fateful words Silicon Valley Bank CEO Greg Becker spoke to his customers last week. They panicked. There was a run on the bank, and regulators shut it down the next day.
For companies that couldn’t pull their deposits, it was a long weekend – especially for those with concentrated risk that had centralised their available cash with SVB. Some technology companies were left wondering if they would be able to pay their bills, or their staff. Aside from ‘don’t panic’, the old adage of ‘Don’t keep all your eggs in one basket’ would have been the last thing they wanted to hear.
Fortunately, the deposits – regardless of the dollar amount – are safe. In the US, a bridge bank has been set up and is functioning. Meanwhile, HSBC bought the UK arm for a bargain basement price of £1.
Diversification is a common refrain for treasurers, but many were left with no choice because of the reportedly heavy-handed approach SVB took with its borrowers. Start-ups typically cannot borrow from traditional banks because they don’t have the track record to prove they are creditworthy. SVB stepped into this void, specialising in tech start-ups and assessing them in a way that was more akin to a venture capitalist.
With few lenders available to such start-ups, SVB had more power in the relationship. CNBC reported SVB’s loan agreements with certain companies required them to maintain all of their operating and other deposit accounts, cash collateral account and securities and investment accounts with SVB.
“Even today it is too easy to say, ‘it is time to diversify’,” says Tony Carfang, Managing Director of The Carfang Group in an ICD Insight webinar. For many, their credit agreement says they cannot do that – “That is the Catch 22 for SVB’s customers,” he adds.
One option is for such companies to attempt to draw down, and if SVB doesn’t give them the money this would mean the bank has breached the agreement first (and so the company is free to diversify with other banks), says Carfang.
This crisis has been a long time coming, explains Carfang. Since the global financial crisis, a number of regulations – Dodd-Frank, Basel III and amendments to the Investment Company Act – have made money market funds less attractive and “the playing field tilted to cash flowing into banks”. The Carfang Group identified a worrying increase in uninsured deposits over 18 months ago, particularly at three banks that have been in the news this week: SVB, Signature and Silvergate. “So many red flags were missed along the way,” says Carfang.
SVB has long been investing in government bonds, which were bought when interest rates were low. As interest rates have risen, the value of the bonds has fallen. Added to this, there have been troubles in the tech industry and venture capital firms have been experiencing a ‘VC winter’, meaning SVB’s customers have been withdrawing deposits. SVB sold some assets to meet these liabilities, but at a loss. Panic was sparked when SVB announced it intended to raise capital to cover the gap.
There have been fears the panic will spread into a banking crisis, particularly to US regional banks as depositors flee to the safety of ‘too big to fail’ institutions. Shares in big European banks have fallen sharply, exacerbated by the crisis at Credit Suisse and fears that the ECB will go ahead with planned rate hikes.
But US President Joe Biden has pledged to do what is necessary, and many pundits are arguing the SVB failure doesn’t pose a systemic risk to the financial system, and European and US banks are well capitalised. Panic, however, can create a self-fulfilling prophecy if the contagion spreads. So, if you feel you are on the edge of a crisis, don’t panic. And don’t put all your eggs in one basket.