Everything you need to get caught up on the SVB crisis

On Friday, the Federal Deposit Insurance Corporation announced that it had taken over Silicon Valley Bank, and as we rushed to plan coverage, one of my colleagues succinctly described the situation: “This is historic shit.”

A week later, we can all agree they were right. But a lot has happened, and unless it’s your job to edit the news, it’s possible you missed a slice of the saga, if not the entire story.

Here’s what went down:

How it started

The drama kicked into high gear in the middle of last week: SVB’s shares fell over 60% on Wednesday evening, when the bank said that it planned to sell shares to raise capital after taking a $1.8 billion charge from the sale of some assets. The bank also indicated that it would boost its borrowing, reinvest capital into higher yielding assets and take on more funding from an external entity.

Given the recent failure of crypto bank Silvergate and SVB’s own troubles due to its exposure to the venture capital and startup ecosystem (which hasn’t been doing well), investors understandably got jittery and started selling SVB stock.

Famously, on Thursday evening, SVB CEO Greg Becker said on a call with customers that the bank had “ample liquidity” to support its clients “with one exception: If everybody is telling each other that SVB is in trouble, that will be a challenge.”

The executive asked VC clients to “stay calm.” He said, “That’s my ask. We’ve been there for 40 years, supporting you, supporting the portfolio companies, supporting venture capitalists.”

We all know how that went.

Around the same time, several sources told TechCrunch+ that VCs were advising their portfolio companies to pull their money out of SVB, fearing a bank run.

In case you aren’t too familiar with how banks can quickly fail thanks to a loss of depositor confidence, here’s how Alex and Natasha explained it in the case of SVB:

A number of investors fear a bank turn — meaning that enough startups will withdraw their capital at SVB, a situation in which the financial institution could wind up upside-down in terms of deposits versus demand for those funds. (Bank runs are often ironic in that they can become self-fulfilling prophecies.)

One investor even told TechCrunch that many VCs are advising startups to decentralize their assets across multiple banks and generally keep no more than $250,000 in SVB checking accounts. (NB: $250,000 is the maximum that is insured by the FDIC, meaning that those funds would have solid external protection.)

SVB’s stock started Friday in the basement as fears of a bank run congealed into reality. Trading of the bank’s shares was halted, reportedly because SVB was frantically trying to sell its assets so it wouldn’t shut down.

SVB also asked its employees to work from home until it figured out the next steps.

What really happened?

To better understand how things had played out, Alex dove deep into what led to the bank going from a relatively stable business to a going concern risk in just five days:

• The COVID-19 venture boom was partially predicated on money being incredibly cheap: Global interest rates were low to negative, so there were few places to put capital to work. This led to larger venture capital funds investing mountains of money into startups, which deposited said money into SVB, as it was, until recently, the premier destination for startups’ banking needs.
• However, as the FT notes, the massive rise in deposits at SVB — never a bad thing at a bank — eclipsed the bank’s ability to loan capital. This meant it had a lot of cash lying around at a time when holding cash was useless for seeing returns.
• The bank invested all that money, at low rates, into things like U.S. Treasuries (page 6 of its mid-March update presentation).
• Later, in an effort to quell inflation, the U.S. Federal Reserve raised interest rates, venture capital investment slowed and the value of low-yield assets fell as the cost of money rose (bond yield trades inversely to price, so as rates went up, the value of SVB-held assets went down).
• The bank decided to sell its available-for-sale (AFS) portfolio at a loss (rates up, value down) so that it could reinvest that capital into higher-yielding assets. SVB wrote to investors that it was “taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients as they invest in their businesses.”
• What did SVB expect after all was said and done? An estimated $450 million boost to its annualized net interest income (NII).
• Initially, TechCrunch+ thought that the bank’s shares were selling off due to investors being unhappy with the $1.8 billion charge it suffered when selling its AFS portfolio, as well as SVB’s plan to sell a few billion shares, which would dilute existing shareholder ownership.
• Instead, the venture and startup market fretted. Why was SVB selling so much stock? Taking such a huge charge? Making such drastic moves? Concern led to fear, which led to panic. Basically everyone was worried that everyone else would panic and take out their capital, so they wanted to do it first. Any risk of capital loss was unacceptable, so folks raced to not be last.
• It later became clear that SVB had greater unrealized losses on its balance sheet compared to peers, which formed a crack in its foundation that would ultimately crater the bank when it attempted to spackle over the matter with the actions it took prior to the bank run.

We were gobsmacked at SVB’s rapid demise: “Why did the bank go from saying it was well capitalized yesterday to what appears to be a fire sale so soon? Our guess at this point, pending other information, is that the panic over the bank’s health led to such an outflow of deposits that it actually did get into trouble. Banking depends on trust, and suddenly SVB didn’t have the market’s.”

A couple of hours later, the other shoe dropped: The FDIC announced that it had taken over SVB, that the bank had failed and it would resume operations on Monday, March 13, with regulators in charge.

“Of the many moves that FDIC is making, the top priority appears to be giving customers access to their deposits,” Natasha wrote. “The same memo says that all insured depositors will have ‘full access’ to insured deposits no later than Monday morning, March 13, and that official checks ‘will continue to clear.’ Uninsured depositors will get paid an advanced dividend within the next week, the memo says, and future dividends could be made as FDIC sells assets of SVB.”

The news that SVB had failed, becoming the second-largest U.S. bank to do so, ruined the weekend for many startup founders and venture capitalists. How were startups going to pay for stuff while the mess was being sorted out?

It’s important to remember that at this time, no one actually knew how things would play out. Startups and investors had little visibility into the FDIC’s plans for SVB, and there was no telling how long companies with funds locked up at the bank would have to go without cash.

Alex explored what was at stake:

A good number of startups have been sitting on huge sums of money raised late in the last startup boom. They were depending on that money to get them through the current downturn. What happens to those companies if they banked at SVB and don’t have that capital available to them? The later stage the startup, the greater its cash needs likely are, and the harder they will be to bridge with straight-up cash.

Some of these cash-rich unicorns are also very upside-down when it comes to their valuations. Precisely who is going to offer them cash at a price on par with their prior round? Probably no one.

It’s a mess right now. This crisis is going to kill a host of startups, either quickly or by simply adding enough operational friction to bring them to their knees.

The (un)stablecoin situation

As if the crypto industry already hadn’t had a bad enough week with Silvergate Bank shutting down, on Friday it became known that one stablecoin in particular, USDC, had held some of its backing capital at SVB, funds that were likely now illiquid for several days at least. USDC is the second-largest stablecoin by market capitalization.

USDC’s issuer, Circle, said the next day that “3.3 billion of the ~$40 billion of USDC reserves remain at SVB,” or about a third of the cash the company said it held in January. Following that announcement, USDC depegged from its $1 target to trade as low as 88 cents.

Meanwhile, Signature Bank, a significant lender for the crypto ecosystem, became the second casualty of the banking crisis on Monday when regulators shuttered the bank, saying “it had caused a systemic risk and could threaten the U.S. banking system.” Around 30% of the bank’s deposits came from the crypto industry.

“Signature Bank’s closure serves as a one-two punch as worries mount over the vulnerability of any bank with exposure to the crypto industry,” Francesco Melpignano, CEO of Kadena Eco, told TechCrunch+. “With only a small number of publicly traded banks having ties to the crypto space, many investors are scrambling to place bets against them.”