The Federal Deposit Insurance Corporation (FDIC) has taken over Silicon Valley Bank and created a Deposit Insurance Bank of Santa Clara. Come Monday, clients will be able to withdraw up to $250K (the maximum amount insured by the FDIC). Clients holding more than that will be given receivership certificates and will then have to go through a bankruptcy-like process to get money back. How much they will be able to get and when is up in the air right now.
Potential consequences of SVB’s failure depend on which of the following three possible scenarios come to pass. They are:
– A purchase by another bank or financiers of all or parts of SVB
– A government bailout
– Liquidation
Many in tech have said they’d expect a purchase to close as soon as tomorrow (Sunday, March 12). I believe a sale is unlikely, at least in the short term. Tens of billions of dollars are at stake, the situation is volatile and opaque, and in such settings, deals don’t get done within a day or two.
There does not seem to be a large risk of contagion for other banks or the financial system at large. Because that is so, we will see just how much Washington hates tech, even though a bail out would most likely generate a profit for taxpayers eventually.
If neither of those solutions come to pass, the consequences for the tech industry will be dire, in a situation in which it is already in crisis.
A lot of startups have their funds in SVB and are currently not able to access those funds in excess of the $250K guaranteed by the FDIC. Y Combinator’s Gary Tan said on CBS that over 1,000 startups are impacted in this one fund alone and will not survive without a bailout.
The most immediate consequence of that is that startups won’t be able to make payroll and will go out of business in short order.
Some payroll processors used SVB to pay out salaries, which now cannot happen. So even companies that are not exposed to SVB themselves will be impacted.
This could be a mass extinction event for startups.
But even more mature companies would be affected. For instance, Roku Inc. has more than a quarter of its funds in SVB.
We will learn more over the weekend.
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