Silicon Valley Bank Drama: Reactions, Comments
As news unfolds about the bank's situation after the weekend, we carry commentary and analysis on what happens next.
Here are reactions today from investment firms and analysts about developments at Silicon Valley Bank in the US and UK. For those who wish to add comments, email firstname.lastname@example.org
“SVB stress is due to an idiosyncratic deposit base facing significant outflows, which exposed the bank to sharp losses on its outsized securities portfolio,” global firm Algebris Investments said in a note.
“As we show below, SVB was a major outlier in terms of the degree to which they were facing deposit outflows (after a tremendous surge in deposit growth in the previous three years), the unusual deposit base dominated by high-balance (and uninsured) accounts, and the extent of the bond losses. The vast majority of large US banks, and certainly holdings across our portfolios, have a more diversified, stable deposit base and robust capital positions both on a spot and mark-to-market basis,” it continued.
“SVB was not a typical US bank and stood out for several reasons. Its business model focused on the venture capital ecosystem. This allowed SVB to grow exponentially in the past four years, growing assets and deposits by >200 per cent to $220 billion and $198 billion at their peaks, respectively. This compares to many of their peers that saw deposits grow at a much lower rate,” the note said.
It concluded: “We were well attuned to the problems percolating at SVB and, in fact, had a short in the stock where we had capability to do so. Our focus in investing in financials is very much on quality, and idiosyncratic events such as SVB serve as a constant reminder as to why we prefer larger, systemic, and well-regulated banks.”
“These banks were also the most affected by regulations introduced post-2008 and are subject to the most arduous requirements and tightest supervision by regulators. In this period of wider market weakness, we have therefore maintained high conviction across our names and view the recent sell-off as a buying opportunity at attractive valuations where quality names trade at 5 to 7x earnings for double-digit ROTE and high single-digit dividend yields.”
Rupert Thompson, chief economist at Kingswood, the UK wealth management group, said: “While the collapse of SVB triggered memories of the Global Financial Crisis, this time it really should be different. Silicon Valley Bank was very much focused on tech startups and ran into problems as the rise in interest rates had led to deposit withdrawals and was forcing it to sell its government bond holdings at a loss.
"The problems SVB faced are not applicable to the large banks which do not face a run on their deposits and generally benefit, rather than suffer, from higher interest rates,” Claire Trachet, tech industry expert and CEO and founder of business advisory, Trachet, said. The saga showed a need for stronger support for UK tech startups outside the lines of institutional funding.
The Global CIO Office said the SBV saga shed light on a number of serious shortcomings in the world's venture capital and related space.
"The largest banks in the US provide little help to the VCs,
focusing instead only on big corporate customers and turning a
blind eye to onboarding VC companies and startups. While the Fed
deems big banks as 'too big to fail', the tighter regulations on
what these banks can and can’t do have made them significantly
more risk averse. VC companies have therefore turned to smaller
banks and the so-called shadow banking industry for their capital
requirements," the firm said.
"It’s ironical that the US financial sector has failed the entrepreneurs who have been the backbone of the entrepreneurial spirit that characterizes the US. Shockingly, nearly 50 per cent of US venture-backed tech and life sciences startups parked their funds at SVB. Such a significant market share in the hands of a single bank was also reflective of the failure of the incumbent banking industry to provide alternative sources of financial services.
"Consider this real example: Company A, incorporated in the US as a fintech business with three years of track record, raises $20 million from very high-quality venture capital funds at a $95 million valuation. With its investors' commitments, it seeks out a bank to deposit its fresh capital funds. It approaches the larger US and UK banks but gets turned down repeatedly because it needs to have the requisite track record of passing the larger bank's rigorous checks, or are deemed too small. It is then encouraged by its institutional VC investors to approach SVB as one of the few banks that will onboard it quickly and allow it to deposit its cash. As the past few months have played out, it (luckily) managed to withdraw its money and seek another institution. Other tech companies were not so lucky."
Preqin Research, the group covering sectors such as venture capital and private equity, said: “The wake of the SVB crisis may prompt further review of banking regulatory oversight (which is not a subject for this newsletter), and reshaping some companies, VC portfolios, and fund managers (which is). SVB was not only involved in taking deposits and making loans, but also fund financing, co-investment, asset management, underwriting IPOs, and sponsoring events and networks. The Oscars were awarded last night (March 13). But the only prize for many businesses today is access to their own cash.”