Financial uncertainty and gloom hangs over California’s massive tech hub as the final chapter of Silicon Valley Bank’s story is written

Silicon Valley Bank (“SVB”), an iconic name within the tech start up and venture capital worlds, abruptly closed its doors today.

A SVB regulator, the California Department of Financial Protection and Innovation, appointed the Federal Deposit Insurance Corporation (the “FDIC”) as the receiver of the bank, the US’s eighteenth largest by crucial financial metrics

The closure was the biggest banking failure since the 2008 financial crisis and the second largest in US history.

Prior to the implosion, SVB resorted to drastic measures to shore up its financial standing.  The deterioration in the bank’s financial condition came to a head on Wednesday, March 8 when it made moves to raise $2.25 billion in the capital markets to shore up its balance sheet.  As SVB encountered more headwinds, that effort fell apart.  SVB’s stock price plummeted and a classic bank run ensued.

SVB depositors are believed to include a “who’s who” list of tech and fintech names, including Circle Internet Financial (“Circle”), Roku, BlockFi, Roblox, Gingko Biowords, Rocketlab USA , Lending Club, Payoneer, Protagonist Therapeutics, Archer Aviation, Cohu, IMG Biosciences, Rhythm Pharmaceuticals, Syros Pharmaceuticals, EyePoint Pharmaceuticals, Atara Biotherapeutics, Iveric Bio, Vera Therapeutics, X4 Pharmaceuticals, CyntonX Therapeutics, Axsome Therapeutics, Wave Life Sciences, Juniper Networks and QuantumScape.  Some of such business entities may have deposited millions in cash at SVB, relying on it solely to support their cash management strategies.  Others may have only di minimis portions of their holdings tied up with SVB.

For any such business entities relying on cash deposits at SVB to meet their payrolls, honor vendor invoices or pay their utility and real estate bills, stark choices lie ahead:  either cut costs in dramatic fashion or try to raise new capital in an environment of rising interest rates and shrinking investor interest in the tech sector.  Due to the bank’s implosion, analysts are predicting a wave of layoffs to occur within companies with heavy exposures to SVB.  That tightening could ripple outward, affecting other businesses adjacent to the tech space.

For venture capitalists with frozen SVB accounts, planned investment rounds may be put on ice or cancelled altogether, snuffing out dreams of business expansion across entire sectors of the startup universe.

Other SVB depositors were crucial financial markets intermediaries themselves.  Circle administers a key stablecoin used as an important financial instrument in the crypto markets.  Pegged to trade at $1 continually, its digital asset traded as low as 81.5 cents on news that Circle had $3.3 billion in deposits at SVB.  Much of that amount may be gone forever.

Higher interest rates lie at the heart of the distress that ultimately brought SVB down.  With financial conditions auguring poorly for aggressive capital raising, SVB’s roster of clients began withdrawing cash from their bank accounts to meet ordinary course obligations.  To cover such withdrawals, SVB found itself short on capital.  In search of liquidity, it sold all of its available-for-sale bonds at a $1.8 billion loss, the bank went on to announce.

In recent days, chat forums frequented by venture capitalist investors and banking industry observers seethed with dire warnings about SVB’s solvency.

Investors and depositors in banks like SVB may be rattled by its abrupt failure, leading to wider contagion in the financial sector.

Not surprisingly, federal policymakers rushed to soothe rattled nerves.  Janet Yellen, the US Treasury Secretary, expressed confidence in the ability of banking regulators to address banking emergencies like the one which arose at SVB.

Silvergate Financial (“Silvergate”), with its heavy emphasis on the crypto sector, announced on March 8 that it was in the process of ceasing its operations.  That move alone may have triggered SVB’s journey into the financial abyss.

Some voices in the investment community sounded dire warnings that additional names in the financial industry are fated to face a reckoning similar to SVB’s.

Following SVB’s implosion, the next domino to fall could be Signature Bank, which holds $114 billion in assets (and occupies the same space as Silvergate).

The FDIC insures up to $250,000 per depositor.  Only 3% to 7% of SVB’s deposits are believed to be covered by such governmental guarantees.

For the uninsured portion of any deposits, the FDIC will pay those off using the proceeds of any completed SVB asset sales.  However, that process can take time and there can be no certainty that any unguaranteed depositor will ultimately be made whole.

If your business is navigating fallout from financial institution failures, or seeking legal guidance on regulatory compliance, financial restructuring, or investor protection, contact us to schedule an introductory consultation with Castle Garden Law. We advise startups, funds, and corporate clients on crisis response, financial law, and regulatory safeguards in an increasingly volatile market.