US Treasury guarantees all SVB deposits

In a move that will likely come as a great relief to Australian companies exposed to the largest US lender collapse since 2008, the US Treasury has taken steps to allow the Federal Deposit Insurance Corporation (FDIC) to protect all deposits at Silicon Valley Bank (SVB).

Tech markets were rocked on Friday as SVB, which has long been a banker de rigueur for VC-backed startups in the US with links to almost half that community, witnessed a bank run as it could not provide the cash to cover its deposits.

This was precipitated by a US$1.8 billion loss on the sale of bonds which had gone down in value amidst interest rate rises, leading some prominent VCs such as Peter Thiel's Founders Fund to urge companies to pull their money out of SVB.

One of the biggest concerns about the collapse up until this morning in Australia was the fact that the FDIC could only cover up to $250,000 in uninsured deposits, and announcements were coming thick and fast on the ASX regarding the level of exposure or lack thereof to SVB.

Companies that had noted their exposure with deposits in the bank included Nitro Software (ASX: NTO), Dubber Corporation (ASX: DUB), TinyBeans (ASX: TNY), Redbubble (ASX: RBL), SiteMinder (ASX: SDR), Freelancer (ASX: FLN), Enero Group (ASX: EGG) and Life360 (ASX: 360), while private companies with exposure include Morse Micro and Plotlogic, with the AFR also reporting Canva and Crimson Education were among those exposed.

Prior to the Treasury's announcement, a Blackbird Ventures spokesperson noted how SVB had been an active supporter of the Australian ecosystem for over a decade, describing the news late last week as a 'sad situation for the startup ecosystem globally'.

Also prior to the guarantee on deposits, Investible CEO Rod Bristow had said his early-stage investment firm's reaction was one of surprise and disappointment. Although he believed the macro-economic fallout would be resolved within three to six months, the bigger worry was the potential impact on business confidence and the 'contagion effect' of what might happen to US startups.

"Silicon Valley Bank had made a strategic decision to grow here in Australia, and I think that was a great thing. There's definitely a need for what they provide, so I think that's a setback," Bristow said.

"It's a confidence play as much as a play around what's actually taking place....I think this has really knocked the confidence around the tech sector in total, which is disappointing."

Like Bristow, Fishburners CEO Martin Karafilis said the early stage impact from the SVB fallout was minimal as the majority of startups also do not hold meaningful capital with SVB.

"VCs and investors are working/communicating with their portfolios to ensure the best outcomes. It's positive to see how they are working through this," Karafilis said at the time.

"Airtree posted on LinkedIn this morning that 28 per cent of portfolio companies have a SVB account but with minimal exposure and are working with founders. The majority of founders are saying that their investors are ensuring they are available to assist and working with them to find solutions to any problems."

Since these these comments were made earlier this morning, the breakthrough announcement was made by Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg.

"Today we are taking decisive actions to protect the US economy by strengthening public confidence in our banking system. This step will ensure that the US banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth," they said in the release.

"After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors.

"Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer."

However, shareholders and certain unsecured debtholders will not be protected, and senior management has also been removed.

"Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law," the US government stated.

"Finally, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.

"The US banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry. Those reforms combined with today’s actions demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe."

It is perhaps too early to fully gauge the wider implications of this decision, but according to Jelix Ventures partner and Innovation Bay co-founder Ian Gardiner, 'if this is true, which I think it is, there's no real exposure'.

"There's still no bailing out shareholders or employees or unsecured depositors, but that's appropriate that all depositors will be made whole as of tomorrow, which is awesome," he said.

"What's more important is the move to underpin the US banking system, because I think the last thing the US wants is a run on all the smaller or regional or potentially wobbly banks, because that would be a disaster."

This was not a bailout. During the GFC, the gov’t injected taxpayer money in the form of preferred stock into banks. Bondholders were protected and shareholders were diluted to varying degrees. Taxpayer money was put at great risk. Many people who screwed up suffered minimal to… https://t.co/mjwcnVRV9X
— Bill Ackman (@BillAckman) March 13, 2023