Quarterly Insights: Bank run at Silicon Valley Bank?

Pat yourself on the back if you had "bank run on Silicon Valley Bank" on your 2023 bingo card.

Santa Clara, CA-based Silicon Valley Bank (Nasdaq: SIVB) has a reputation of being, arguably, the most friendly and popular bank to startup companies, tech, and venture capital firms (although our friends at First Republic Bank (NYSE: FRC) may beg to differ given they also have a significant footprint in the industry). However, in the wake of La Jolla-based crytpo-bank Silvergate Bank (NYSE: SI) declaring bankruptcy earlier this week (due to irreversible damage caused by its exposure to the FTX fraud) SIVB announced to the market that they were raising capital to shore up the quality of their balance sheet, which had been hit quite hard due to the combination of rising rates and the tech downturn over the last 12 months.

Although it's generally not a good thing to hear that your banking partner needs more capital because their balance sheet has experienced material deterioration, depending on how you think about it, the timing of this announcement by SIVB is...not ideal. Why? Well, the market did not take it well, hammering the equity of SIVB to push it down 60% as of the close of trading on Thursday. However, the more meaningful aspect of this development is that it led to a swift outcry by some very influential Silicon Valley investors that this was the beginnings of a classic bank run. These investors advised management teams at portfolio companies to pull their cash from SIVB immediately.

What is a company to do in these types of conditions? Let’s discuss some considerations that should be a basis for developing a playbook to handle these type of conditions and events.

First of all, it’s important for a management team, and in particular, the CFO and finance org, to appreciate and understand the gravity of this type of situation. Even if it may be presumptuous to think that a banking institution as large as SIVB (which is subject to extensive regulatory requirements to maintain its good standing with regulators) will fail overnight, because a company management team has serious legal obligations to shareholders pertaining to the handling of company assets, it is imperative and entirely appropriate to consider the worst-case scenario right away. Now having said that, there is a big gap between: sounding the alarm and taking decisive action.

And from a leadership standpoint, this is where the wheat gets separated from the chaff.

It is important to understand that operating cash is obviously very sticky due to the nature of funding routine operations such as payroll and working capital accounts. Even if a company had multiple banking relationships and could, theoretically, wire the entire balance of the treasury from one institution to another, from a practical standpoint this could have other adverse implications due to the disruption to cash flow. Depending on the type of company and industry, just the mere act of pointing where revenue should go to may, in some circumstances, require updates to agreements which could take time and be protracted given that the market conditions would lead other organizations to be doing the same thing. The same goes for cash going in the other direction; and ultimately all of this will have an impact on a company’s financials. Therefore, the onus is squarely on the CFO to decisively communicate to the rest of the management team, the rationale for a potential transfer of the entire balance from one banking partner to another—if that were even immediately possible—or not. It’s also worth commenting that a company should consider that, if the market conditions were such that real contagion was imminent, it’s unlikely that other banks wouldn’t also be facing similar circumstances; so transferring assets to another banking partner probably wouldn’t go far as a true solution.

In contagion-like conditions, it is important that the CFO work with the finance team to have an immediate handle on data to assess the impact on cash. This is much deeper in scope then the typical activities involved in the routine update of the cash flow forecast. Rather, this will require the finance team to work closely with legal advisors to understand the counterparty exposure both at the banking level (for current treasury assets) as well as the immediately pending inflow and outflows of cash (for future treasury assets). If there truly is a risk of the banking partner failing, what are the procedural steps for directing cash elsewhere in the immediate term (in the case of cash inflows). What is the plan for payables (in the case of cash outflows). In order for the CFO to provide management with informed options, it is all about having visibility into exposure—this is where the finance team can provide detail based on customer agreements, vendor contracts, and all other material agreements impacting cash—if a company’s customers and vendors are also having similar duress due to bank runs (and this would be common in an industry like tech that is many interdependencies) what does that ultimately mean for operations and the appropriate measures a company could take to mitigate the impact of a bank run?

It has been quite a long time since the period of 2007-2008, the last period where the idea of "bank contagion" was on the radar of company management teams. Even at that time, it took the Lehman catastrophe to bring counterparty exposure to the forefront of management attention. The banking world we operate in today is very different BECAUSE of the Great Financial Crisis and bank solvency, due to both a vastly different regulatory regime and Fed policy measures, is not as acute of a risk at all as it was pre-2008. Although companies should expect to see banking conditions normalize over the next few weeks this week's events are an important reminder to develop a strategy and playbook to deal with severely distressed financial markets.