Silicon Valley Bank: How the bank’s collapse could impact private market policy

Author:
The Carta Policy Team
Published date:
March 16, 2023

The failure occurred in the banking system, but its effects will not stop there. The turmoil will affect and inform how the SEC and Congress approach venture capital and private market policy.

On Sunday, March 12, Treasury Secretary Janet Yellen announced that all depositors of Silicon Valley Bank (SVB) would be made whole, the Federal Reserve would establish a term lending facility to alleviate liquidity pressure, and that the U.S. Treasury would be ready to deploy $25 billion from its exchange stabilization fund, if necessary. The Biden Administration’s goal: preventing bank runs at other institutions by assuring depositors across the country that their money was safe.

Yellen’s statements followed a harrowing 72 hours: On March 8, Silicon Valley Bank announced it had sold approximately $21 billion of its “available for sale” securities and planned to raise $2.25 billion to bolster its balance sheet. Rather than assure shareholders and investors, the announcement caused a steep drop in SVB’s stock price and generated panic among the bank’s depositors, who raced to move their money. On Friday, March 10, the Federal Deposit Insurance Corporation took control of SVB to guarantee insured deposits.

How we got here

Congress and federal regulators have launched investigations that will offer a more complete picture of SVB’s failure. For now, consensus centers on specific risks the bank undertook and factors that ignited those risks:

• SVB’s business model: SVB focused on the innovation economy, and its deposit base mirrored the fortunes of its clients. In 2018, the bank had approximately $49 billion in deposits; this figure ballooned to $189 billion in 2021. Further, SVB’s client base was concentrated among large account holders. This means that more than 90% of the bank’s deposits were uninsured by the FDIC.

• Bad investment decisions: Awash in venture cash in 2021, SVB invested a significant portion of the bank’s deposits in long-dated, low-interest bonds. As interest rates rose, the value of these bonds diminished. This meant that if a liquidity crisis forced the bank to sell these assets, it would be at a loss.

• Flawed communications strategy: SVB’s attempts to reassure clients by communicating the asset sale and related fundraise had the opposite of the intended effect.

• The VC echo chamber: News travels faster than it did in 2008—especially in Silicon Valley. Venture capitalists filled the ranks of depositors at SVB and became known to almost everyone in the venture community within hours.

The government’s response

The regulators: Who they are and what they do

The FDIC: Created in the aftermath of the bank runs that generated the Great Depression, the FDIC guarantees deposits of up to $250,000.

The Federal Reserve: The Fed is in charge of monetary policy. It regulates and supervises Bank Holding Companies to ensure financial stability.

The Treasury: Charged with maintaining a strong economy through managing the nation’s finances and protecting the integrity of the financial system.

Policy tradeoffs

Washington policymakers wrestled with whether and what action to take.

Leaving depositors to assume the unknown losses

If SVB failed without a buyer or a government backstop, depositors would likely lose some portion of their uninsured deposits.

Rescuing depositors by guaranteeing their assets

Government intervention would also set a new precedent, guaranteeing all deposits and establishing a term lending facility.

Treasury’s decision

As it became clear that runs were not only possible but likely, the government stepped in.

Policy path ahead

Policymakers have commended the actions taken to prevent further contagion. They will begin to assess:

• What led to the failure and possible contagion
• Who was responsible
• What—if anything—should be done going forward.

What went wrong

• Congressional investigation: The House Services Committee and Senate Banking Committee are expected to hold hearings.
• Federal Reserve review: A report will be released regarding the Fed’s role in failing to identify the risks.

Who is to blame

Most agree that SVB’s management failed to manage the institution. Some blame the supervisory teams at regulators, while others point to actions Congress took in 2018 to relax regulatory standards.

The path forward

Policymakers will need to stabilize the banking system and address an array of problems:

• Preventing capital concentration: Depositors are moving money to larger banks believed to be stable.
• Ensuring adequate oversight: Adjustments may be made regarding the regulatory framework.
• Higher consumer banking costs: Insurer fees may increase due to the government backing all deposits for SVB and Signature.
• Regulating in a digital age: Policymakers will need to wrestle with stemming a psychological interconnectedness.
• Regulating social media: Discussions around restricting types of speech and heightening scrutiny.
• Calibrating interest rates: As the Fed raised rates to combat inflation, pressures to moderate its approach may arise.

Implications for venture ecosystem

Critics of the private markets have seized on SVB’s failure to call for greater private-market restrictions.

SEC leverages turmoil to advance agenda on private markets

SEC Chair Gary Gensler has pointed to bank failures as a reason to strengthen regulations around private markets and venture capital.

Congressional agenda on private markets delayed, but remains a priority

Chairman McHenry remains interested in advancing legislation to expand investor access but will face delays.

Carta’s policy team aims to connect the policymaking community and venture ecosystem to build an ownership economy and advance policies that support private companies, their employees, and their investors.