As Silicon Valley Bank Folds, Can FinTech Outrun the Bank Runs?

Silicon Valley Bank has collapsed. The regulators have circled the wagons.

The damage is contained.

Maybe.

Maybe just for a day, because who knows what comes next?

As Friday’s stock market roller-coaster ride ended, no one could answer that question.

The FDIC has done what it could do, having shut down SBV Financial and announcing that insured depositors will have access to their deposits by Monday when branches open up, under the control of the regulator next week. One might imagine that there will be a scramble by venture capital firms (VCs), portfolio companies and individual account holders to get the money out and figure out what to do with it later.

This is Silicon Valley, we note, where the $250,000 covered by FDIC insurance might be called:

Lunch.

That’s a tongue-in-cheek way of saying that though Silicon Valley Bank has been undone by a classic run where the bank ran out of money and lost the faith of its customers (and Wall Street), this is a banking model of a different stripe.

It will take time to sort out what, how and when the funds will get paid out. But as noted on the FDIC site, that $250,000 is what’s covered “per depositor, per insured bank, for each account ownership category.” There are different account ownership categories, and depositors may indeed qualify for coverage “if they have funds in different ownership categories and all FDIC requirements are met.”

There’s at least some indication of the process that’s underway. In the FDIC announcement that came Friday that created the Deposit Insurance National Bank of Santa Clara, which now holds the insured deposits from SVB, “The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds.” In one bit of news that drives home the fact that nothing is certain and much depends on the processes underway:  LendingClub Corp. on Friday said in an SEC filing that it has $21 million in funds on deposit at SVB and “the recovery of funds will be subject to the FDIC process.” The money isn’t material to LendingClub’s liquidity, but there’s the tacit acknowledgment that things will have to play out (and that some money could be lost).

A Scramble Come Monday?

Let’s assume that the majority of depositors will pull their holdings — the company has said that in the quarter that ended in December, it had about $348 billion in client funds. Of that tally, $173 billion was held in deposits. That’s a lot of dividends and receivership certificates.

Drill down a bit, and 6% is held in private banking, and 30% in early-stage tech. These are the founders and the high net-worth individuals, the tech shops that would be inclined to get their money out — but the question becomes where they will put it. The impact will be widespread, given that 11% of funds are held internationally.

SVB’s loss may be a bonanza for neobanks — many of them are startups themselves, so we’ll see if they’ve got the capacity/ability to onboard a mad rush of new clients. As noted by CNBC, Brex has already seen billions of dollars worth of inflows from SVB customers. So has J.P. Morgan Chase and other more traditional names.

Among the great unknowns, however, is what contagion there may be and whether the FinTechs and the new tech companies will be able to outrun the specter of the bank runs. The cash burn that SVB referenced in its announcement this week that it was seeking to shore up liquidity is real — and it will accompany these firms no matter where they park the funds they’ve (eventually) grabbed out of SVB.

Should those same pressures linger, where rising interest rates and a tougher capital-raising environment might push new clients at Brex and elsewhere to struggle with cash management and liquidity, the new banks may face their own pressures.

It may be the case that as these customers continue to spend money, deposits will continue to shrink, and no financial institution (FI) wants that.

Looking back, it was a week that, improbably, made Silvergate Capital’s implosion seem like a drop in the bucket. We’ve seen this story before, not all that long ago. When in 2008, banks failed, banks faced questions about viability and found themselves fenced off by regulators to avoid contagion.

And the old aphorism that never rings true won’t ring true this time either: This time, it’s different.