Tech Startup Lenders' Failure Triggers Banking Sector Concerns and Market Turmoil

Silicon Valley Bank and Signature Bank, two of the most recognizable lenders in the world of technology startups, recently experienced unexpected failures and seizures, heightening concerns of a more comprehensive financial crisis in the banking sector. This panic resulted in a stock market crash on Monday as people rushed to withdraw their deposits.

Even as the U.S. government intervened to reassure Americans that the banking system was robust and safe, investors kept selling bank stocks out of fear of additional bank runs. Consequently, all banks nationwide are experiencing market turmoil as shares and stock indexes continue to fall.

The Federal Reserve Bank of San Francisco, in charge of overseeing the failed bank, believed there was a need to conduct a thorough, open, and prompt investigation into the events surrounding Silicon Valley Bank. As a result, the Federal Reserve declared that it would examine how Silicon Valley Bank was being managed.

Before last week, Silicon Valley Bank had about $175 billion in deposits. Similarly, Signature had less than $100 billion before it closed. So, it was difficult to tell whether stakeholders were responding to the flaws in those companies' financial statements or to the prospect that they would experience the same issue as Silicon Valley and Signature.

The fact remains that all bank stock investors do not like uncertainty, and there is a lot of it at the moment. That alone is enough to cause a lack of stock market confidence, which leads to a lack of depositor confidence.

Even though there is no direct correlation between a bank's stock price and the strength of its balance sheet, investors and depositors often use market performance as a bank's financial health indicator. So, a drop in depositor confidence could result in a spike in withdrawals, which could ruin a bank.

Meanwhile, smaller banks, especially those that cater to specific clientele groups, are particularly susceptible to financial panic. The failure of Silicon Valley Bank on Friday and the closure of Signature Bank by the government the following Sunday proved this.

Silicon Valley primarily dealt with tech startups, while Signature Bank financed New York's legal and real estate sectors. According to Tyler Gellasch, president of the Healthy Markets Association, even if the problems of these two banks did not pose a significant systemic risk, their significance is enough to make bank runs destabilize the industry.

Perhaps, that is a lesson that other banks must learn from the Silicon Valley Bank story. If you are a bank, and most of your customers are tech startups whose funding ability is sensitive to rising interest rates, investing their deposits in long-dated bonds that will lose value if interest rates rise is not a good idea.

Another takeaway is that Silicon Valley Bank's extremely online clientele might have played a role in the bank's fall. It is usual for banks to sell their assets, encounter issues with liquidity, and raise short-term capital to address them. All of these happen, and customers typically do not notice or care.

What happened to S.V.B. would likely not have sparked panic at the many typical, midsize regional banks. However, S.V.B.'s clients are somewhat different kinds of people. They are startup founders and investors who carefully review banks' securities filings, pay close attention to risk and volatility, and spend most of their time interacting online.

"So, it is easy for just a few tech professionals to start expressing concerns about the firm's viability on social media; before you know it, there is widespread panic about the firm. That would not have occurred if S.V.B.'s clients were dog groomers and restaurant owners rather than the founders of tech startup companies," says Attorney Charles Boyk of Charles E. Boyk Law Offices, LLC.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.