The SVB shows that there are few libertarians in a financial foxhole

The writer is the founder He toastedan FT-backed site about European start-ups

As the 16th largest bank in the United States, Silicon Valley Bank was not large enough to qualify as a systemically important financial institution. But if its many distressed depositors are to be believed, the failed bank is still considered a technologically important bank.

It’s probably stuck in your throat that the US and UK financial authorities had to craft an emergency bailout for an institution and industry so fond of protesting government intervention and lobbying for tighter regulatory oversight. Nevertheless, it is a pragmatic step to provide shelter to tens of thousands of mostly blameless depositors of SVB, many of whom would have gone bankrupt even without financial cover.

In the United States, the Treasury Department and the Federal Reserve announced Sunday night that the Federal Deposit Insurance Corporation will provide emergency financing to protect SVB depositors even as shareholders and bondholders are wiped out. The FDIC also seeks to discharge SVB’s remaining assets as soon as possible.

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Hours later, the UK Treasury announced it had approved the sale of SVB’s major UK arm to Europe’s biggest bank, HSBC, for a token £1. Hear the sighs of relief among panicked tech entrepreneurs who spent their weekends frantically trying to figure out how to pay their employees this week.

Both national authorities emphasized that their taxpayers will not be exposed to any losses. In the United States, officials said the shortfall would be covered by a levy on the rest of the banking sector.

However, both interventions still raise vague questions about the extent and effectiveness of financial regulation. U.S. officials said Treasury Secretary Janet Yellen cited a “systemic risk exception” to justify the support. What other lurking horrors will be revealed in the era of rising interest rates?

The SVB fiasco also shines an unforgivable spotlight on the hypocrisy of the biggest venture capitalists on both sides of the Atlantic, who privately urged their portfolio companies to withdraw their money from the bank and later publicly called for government bailouts. SVB collapsed on Friday in a classic bank run after customers withdrew $42 billion in deposits.

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After the global financial crisis of 2008, like many banking titans, the tech tycoons favor the privatization of profits and the socialization of losses. Few libertarians are in a financial foxhole.

In hindsight, it’s clear that the reasons for SVB’s remarkable growth over the past 40 years were also the reasons for last week’s stunning collapse in less than 48 hours. For decades, the bank played a critical role in the U.S. tech economy by narrowly focusing on servicing risky, unsecured tech startups that were far from ideal clients for traditional financial institutions. The bank has also managed the personal finances of numerous technology entrepreneurs and investors and has invested in several venture funds as a limited partner.

SVB boasted that it provides services to nearly half of the venture capital-backed technology and life sciences businesses in the United States, as well as startups in Europe, India, Israel and China. However, at the end of 2022, it held $157 billion in deposits in just 37,000 accounts.

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This concentrated exposure has allowed the bank to ride the extraordinary bull market in technology over the past two decades. But this also made him extremely vulnerable in the downturn. An excessive one-way bet on the US Treasuries market proved fatal for SVB after the interest rate cycle turned.

“It turns out that one of the biggest risks to our business model is catering to a very close-knit group of investors who have a herd mentality,” a bank executive told the FT.

The near-death experience of thousands of start-ups exposed to SVB will certainly have a salutary effect on the technology sector. “If we can’t manage our own money better, it’s up to us, not the taxpayers” concluded one of the founders at the weekend.

Skillful action by regulators could have resolved the industry crisis. But treasury management is now likely to rank high with product development and customer acquisition as survival skills.