RESEARCH TRIANGLE PARK – CNN reported that the collapse of Silicon Valley Bank created a wave of fear across the tech sector on Thursday and Friday since technology firms and startups are its primary customers. There’s been talk as well that SVB – which was seized by regulators on Friday – could trigger a wave of bad news for many other banks. But is this more hype than reality? Could SVB’s failure burst tech’s bubble?
Two prominent Triangle columnists and a lawyer focused on the tech sector spoke out on the consequences as some Triangle businesses were withdrawing funds before SVB’s doors closed. (SVB does have an office in Raleigh, by the way, and has had a presence in the Triangle for more than two decades.)
UNC-Chapel Hill’s Dr. Greg Brown pointed out: “It’s going to be, certainly, interesting to watch the train wreck that is Silicon Valley Bank right now.” He said that before news of the seizure broke.
“You know, I feel for them. Because I think they provide a really unique role in the ecosystem,” Brown, the Executive Director of the Kenan Institute of Private Enterprise at UNC Kenan-Flagler Business School, added. “I mean, they’re not just another bank. They’re a specialized bank. But you know, because of that, because there is real franchise value to what they do, somebody is going to come in and effectively bail them out or take them over, in my opinion.”
Tech sector fallout on SVB
N.C. State economist Dr. Mike Walden stressed that the “development certainly desires watching.”
“With the tech sector revising its aggressive outlook, it is understandable a financial lender that focuses on tech may have problems,” he explained. “Of course, the Federal Reserve has powers to prevent a general financial meltdown, (these powers were best displayed during the subprime crisis in the late 2000s decade), and I would expect the Fed to intervene to prevent a crisis.”
The seizure of SVB could help.
SVB primarily lends to tech startups and emerging companies which have been hit by rising interest rates and dwindling venture capital, leading many customers to pull their deposits out of the bank. The situation has raised concerns about contagion in the banking industry.
“I mean, we know that the VC markets have cooled off, we know that tech, in general, has cooled off,” said Brown. “So I think the question we should be asking ourselves is, ‘Is this more fallout from a tech bubble bursting, that may have very little to do with interest rate policy or broader economic trends?'”
But according to Brown, we’re not going to see a “spillover” into other banks or into the housing market or consumer lending.
“Businesses in general have a lot of cash on hand, their leverage has creeped up, but I think businesses are continuing to do quite well. So I don’t worry about broad corporate defaults at this point, or distress,” said Brown. “So my intuition is that this is going to stay isolated in the tech sector.”
A ‘niche’ bank
Jim Verdonik, a veteran lawyer in Raleigh focused on the tech sector at Innovate Capital Law and who has guided startups through stock offerines as well as acquisitions and mergers, is doubtful SVB’s fall who have much impact.
“It’s only important because its niche is technology,” he said. “SVB doesn’t lend to early-stage start-ups. Its market is mid-sized tech businesses. So, I don’t think this will hurt early-stage companies.”
After reviewing more information after the seizure was announced, Verdonik checked back in with more analysis. and warned of cash flow issues.
“Now that the failure is official, I note that the bank says uninsured deposits were about $151 billion at December 31, 2022,” he said. “Much of this was probably deposits by VC funds and tech companies.
“Much of this money will eventually be recovered as the FDIC liquidates the bank’s assets. In the meantime, some tech companies may experience cash flow issues while they wait to be paid.”
However, he noted SVB’s woes are to him indicative of challenges “big banks” face in general.
“The biggest impact on the economy is that the big banks all have less money they can lend, because their government bonds have less value.
Interest rates are increasing,” he said. “This will slow the overall economy, which should help battle inflation.”
What next for SVB?
Brown does think an SVB buyout is likely.
“Silicon Valley Bank may be you know, a subsidiary of Citi, or JP Morgan, or something like that, next week. Or, you know, Warren Buffett, a part of Berkshire Hathaway,” said Brown. “We’ll see what happens. I think they’re in trouble right now. And, you know, it’s a classic loss of confidence in a particular financial institution. Which is very hard for them to recover from.”
On the question of whether what’s happening at SVB will further disrupt what’s happening in tech, Brown said, “I don’t think so.”
“There’s lots of people out there that are willing to lend to credit-worthy businesses,” said Brown. “So I don’t see it as a snowballing, you know, financial contagion inside the tech sector.”
If there are any effects, Brown says they won’t be immediate.
“There is a concern about you know, if we overshoot on the tech correction, you know, this having longer-term impacts on the economy, but that sort of role of innovation and productivity growth is something that happens at a much longer frequency, a much longer horizon,” said Brown. “So, it’s not something that I think we need to have a big cyclical concern about. We’re looking at what the economy is going to do in the next year or two. That’s more of a 10 or 20-year horizon.”