Since Friday, the entire US banking system has been in turmoil. The FDIC took control of the Silicon Valley Bank, alerted by accounts that had been frozen due to the institution’s failure. 96% of them were not covered by the traditional deposit guarantee. The SVB really imploded following the massive withdrawal requests from its customers and is in a state of bankruptcy. The same had happened to Silvergate Bank a few hours earlier.
Soon, other institutions were in trouble as investors fled the stock market. California’s First Republic lost 30% of its value in two sessions, and Signature Bank was shut down on Sunday night to avoid further contagion. This is the 21st US bank with assets estimated at $110bn at the end of 2022.
Faced with what is the biggest banking crisis since 2008, the authorities have taken swift action. The Federal Reserve (Fed), the Deposit Insurance Corporation (DIC) and the US Treasury have guaranteed that customers will be able to withdraw all their deposits despite the failure of the institutions. The institutions have also pledged to lend the necessary funds to other banks that may need them to meet customer withdrawal requests.
An attempt to restore Americans’ confidence in their banking system.
On Monday morning, it was announced that SVB’s UK arm had been sold to HSBC for £1, a sale “facilitated” by the UK government and the Bank of England.
Later in the day, President Joe Biden will speak. Announcements are expected on how the resilience of the banking system will be maintained to protect the economy. The president has already indicated that he is “firmly committed to holding to account those responsible for this mess.”
Peril for the tech sector and start-ups
Now it is a shockwave in the start-up sector that is feared. SVB presented itself as “the financial partner of the innovation economy.” It boasted that almost half of its clients were technology and life science companies.
“The real victims of SVB’s collapse are the depositors: start-ups with 10 to 100 employees, which can no longer pay salaries, will have to lay off people or make them redundant as of Monday,” reacted Garry Tan, CEO of Y Combinator, a startup incubator, on Twitter. “In a month or two, we will have wiped out a generation of American start-ups,” Tan warned. “This is years of American innovation at stake.”
The disappearance of the Californian bank “could destroy an important engine of the long-term economy, as private equity-backed companies depended on SVB for their loans and cash flow,” agreed activist investor Bill Ackman, on Twitter. For the financier, if no financial institution takes over, possibly by absorbing what remains of Silicon Valley Bank, “a public bailout should be considered.”
This story was first published in French on Paperjam. It has been translated and edited for Delano.