Silicon Valley Bank claimed to have worked with about half of the nation’s venture-backed startup companies. It was more like a few dozen in Wisconsin, thanks to the same geography that often puts the state at a disadvantage when it comes to attracting outside venture capital.
That small Wisconsin number was comprised mostly of bank deposit customers who could access all their SVB cash once the Federal Deposit Insurance Corp. swooped in. The FDIC’s quick action guaranteed all deposits over $250,000 at the California-based SVB and New York’s Signature Bank, also swamped by a liquidity run. Payrolls in dire jeopardy on Friday appeared secure a long weekend later.
An extinction event was avoided … and some valuable lessons emerged for almost everyone involved.
For banks: Customer deposits at SVB were heavily invested in “held-to-maturity” treasury bonds, which remained at low yields as interest rates rose. Deposits are booked as a liability to a bank because they are not the bank’s money; they must be returned when the customer wants. Everyone wanted their money all at once, sped by a social media flurry, which triggered a “run” on deposit withdrawals that exceeded liquidity.
For business customers: The adage about not keeping all your eggs in one basket almost led to billions of shattered eggshells and yolks on the floor. If a bank fails, the FDIC protects up to $250,000 per deposit account customer, per institution and per ownership category. That limit still applies at every U.S. bank except for SVB and Signature. By the way, there are options available to insure accounts as large as $50 million. Young companies with larger holdings should ask about their alternatives.
For the Federal Reserve: It’s unclear if the economists at the Fed fully considered the implications of cascading interest rate raises on banks stuck with held-to-maturity bonds. There are limited ways in which banks themselves can invest money, with bonds being a major option. The U.S. economy has yet to respond to its interest rate medicine, as predicted several raises ago. Has the cure eclipsed the disease?
For policy makers in Washington: It would help to tone down partisan rhetoric and recognize there isn’t a single solution. The combination of inflation, higher interest rates, war in Ukraine and pandemic hangover has been a lot to digest. Yes, there was a Trump-era easing of some bank “stress tests” that Congress may re-examine. Yes, throwing more federal money on the economic fire while the Fed is pouring water on the same seems at cross purposes. However, the best way to stampede people and markets into doubting the solvency of U.S. banks is to unjustly assert they aren’t or to lump them in with certain foreign banks. Almost all regional banks are far more diversified than SVB or Signature, so don’t throw them out in the same bathwater.
For policy makers in Madison: Both SVB and Signature were concentrated in technology holdings, one way or the other. Does that mean the tech and entrepreneurial industry is going down with the ship? Let’s hope not. Startups remain the wellspring of innovation and new jobs in the United States and Wisconsin, where the biggest problem isn’t two out-of-state bank meltdowns but the lack of in-state capital.
If there was more venture capital in Wisconsin, young companies wouldn’t be tempted to look halfway across the country to find it. The recent success of the Wisconsin Economic Development Corp. in landing $50 million in State Small Business Credit Initiative money for venture is one good step. Adoption of a $750 million public-private fund, as recommended in the current state budget, is even more vital.
It’s not 1929 or 2008, and the market may already be on its way to fixing itself. Instead of turning its back on young companies, Wisconsin should pick this time to double down.
Tom Still is president of the Wisconsin Technology Council. He can be reached at firstname.lastname@example.org.