From: allin
The collapse of Silicon Valley Bank (SVB) highlighted significant issues in regulatory oversight and risk management within the financial system, particularly concerning regional banks and the startup ecosystem [02:01:06]. This event is considered by some to be a “Lehman sized event for Silicon Valley” [03:14:26], akin to the 2008 financial crisis [02:32:41].
Context: Silicon Valley Bank Collapse
On March 8, 2023, SVB announced a 42 billion in deposits withdrawn on March 9, resulting in a negative cash balance of nearly $958 million [08:08:00]. The FDIC subsequently shut down SVB at noon on Friday [08:40:00].
The crisis immediately impacted thousands of companies, particularly small and medium-sized startups (10-100 employees), trapping their funds and jeopardizing their ability to make payroll [03:45:00]. This poses a potential “extinction level event” for the startup ecosystem [04:21:00].
SVB’s Risk Management Failures
A core issue at SVB was its “duration mismatch” [19:46:00]. The bank invested customer deposits, which could be called on a daily or weekly basis, into longer-duration assets, primarily 10-year mortgage-backed securities (MBS) and U.S. Treasuries [20:37:00]. When interest rates rapidly increased, the market value of these long-dated bonds plummeted [35:38:00].
Furthermore, a significant portion of SVB’s loan portfolio (10% or $7 billion) was in venture debt [14:32:00] [30:14:00]. This type of lending, which relies on venture capitalists continuing to fund companies, became distressed as VC investing declined [14:41:00] [25:47:00]. Critics argued that using customer deposits for such risky, non-liquid investments was inappropriate [26:16:00] [56:26:00].
Regulatory Oversight Shortcomings
Despite being a top 20 bank [05:13:00], SVB was believed to be in regulatory compliance [05:16:00]. However, several regulatory issues were identified:
- Accounting Loophole: Regulators permitted banks to hold 10-year bonds at their book value rather than “marking them to market” daily, concealing unrealized losses until assets were sold [22:52:52] [53:00:00]. The Wall Street Journal reported U.S. banks had $620 billion in unrealized losses on Treasuries alone [52:48:00].
- Venture Debt Risk: Allowing customer deposits to fund high-risk venture debt without collateral [23:16:00] [31:01:00].
- Lack of Proactive Action: Concerns were raised that regulators were “asleep at the wheel” [33:11:00]. Just two days prior to the collapse, Fed Chair Jerome Powell testified there were no systemic risks in the banking system due to rising interest rates [33:15:00]. Treasury Secretary Janet Yellen’s statement of “monitoring the situation” was seen as insufficient [34:45:00].
Contagion and Systemic Risk
The SVB collapse immediately triggered a broader regional banking crisis [05:02:00]. Depositors, realizing their money was not safe beyond the $250,000 FDIC insurance limit [05:28:00], began moving funds from regional banks to larger “too big to fail” institutions like JPMorgan Chase [05:38:00] [59:51:00]. This “game theory” of bank runs, where rational actors move money out to avoid being the last to leave, creates a self-fulfilling prophecy [52:19:00] [11:50:00].
The crisis extended beyond tech startups to payment processing companies and payroll providers, demonstrating potential downstream economic consequences if payrolls are missed for non-tech businesses [44:12:00]. It could also impact the Chinese innovation economy, as SVB served as an on-ramp for U.S. investors into China’s complicated capital market structure [46:53:00].
Proposals for Regulatory Reform
To prevent wider systemic failure and mitigate the crisis, immediate action from the federal government was called for [46:02:00]. Proposed solutions included:
- Government Backstop: The federal government should guarantee 100% of deposits for the entity that takes over SVB, potentially by warehousing distressed assets, similar to the Troubled Asset Relief Program (TARP) in 2008 [46:25:00] [41:48:00]. It was noted that TARP ultimately returned a profit to the American people [48:06:00].
- Public Stake in Innovation: If public money is used, the U.S. taxpayer should receive a share in the innovation they are effectively saving, potentially through warrants in companies or the acquired bank [49:45:00] [51:24:00].
- Increased FDIC Limits for Businesses: The 25 million [01:19:15].
- Stricter Bank Asset Rules: Banks handling customer deposits should be highly restricted to investing only in highly liquid, mark-to-market assets, making less money but ensuring safety [01:19:37] [01:32:00]. This addresses the fundamental question of what banks should be doing with depositor capital [55:00:00].
- Regulatory Transparency: Regulators should proactively identify and address risks like duration mismatches rather than relying on external analyses [21:52:00]. The importance of regulatory oversight and effective AI regulations and US policy in other sectors is also discussed in the context of government efficiency and regulations [01:13:00].
Impact on Venture Capital and Startups
The crisis created a chilling effect on the venture capital world. Venture firms faced calls from their portfolio companies for immediate cash to cover payroll [01:07:00]. Limited Partners (LPs) in venture funds received numerous requests for early capital calls [01:01:22]. The uncertainty could lead to a freeze in deal-making, with VCs focusing on shoring up existing portfolios rather than new investments [01:06:07] [01:12:00]. This highlighted a past complacency in venture, where “risk management” was not seen as worthwhile [01:04:36], leading to misallocation of funds and impaired valuations [01:05:23].