Key Takeaways
- Silicon Valley Bank and Signature Bank collapsed in March 2023 after depositors panicked over their uninsured deposits.
- Startups and technology companies may face financial difficulties in the short term as Silicon Valley Bank played a major role in financing them.
- Procurement professionals may need more detailed measures of vendor financial risk as uninsured deposits are not reflected in the Altman Z-Score.
What happened to Silicon Valley Bank?
Before its collapse, Silicon Valley Bank (SVB) was the 16th largest bank in the United States, with $212 billion in assets at the end of the fourth quarter of 2022. However, unlike most of its peers, SVB had a very high share of deposits in excess of the Federal Deposit Insurance Corporation (FDIC) limit of $250,000 per depositor per account type per institution (93.9% according to S&P Global). The high share of uninsured deposits left the bank vulnerable to bank runs. A bank run is when large numbers of customers of a specific bank withdraw their money at the same time over fears about the bank’s solvency—a bank’s ability to pay off debts. When customers withdraw more money than the bank has on hand, the bank will utilize its entire cash reserves and even default on their loans. The FDIC was established in 1933 to reduce the frequency of bank runs.
Most of SVB’s depositors were startups and technology firms, who preferred doing business with SVB because the bank had cultivated relationships in the area and was seen as friendlier to startups. Many of these depositors put “their eggs in one basket” and did not diversify their investments, which put both themselves and the bank at risk.
Ultimately, the trigger for the bank run was an increase in interest rates. The Federal Reserve started raising its benchmark rates in March 2022 in response to inflation; the target range rose from 0.0% to 0.25% in March 2022 to 4.75% to 5.0% in March 2023. Higher interest rates led to asset markdowns for financial institutions; according to the Stanford Institute for Economic Policy Research (SIEPR), SVB’s assets declined by 16.0% from March 2022 to March 2023.
On March 8, SVB announced a $1.8 billion loss; in response, the stock fell 60.4% on March 9. Depositors panicked, knowing that most of their deposits were uninsured. They moved to withdraw their money, which caused the bank to collapse on March 10.
This was the second-largest bank failure in US history (after the failure of Washington Mutual in 2008). And it had a domino effect: depositors pulled $10 billion out of Signature Bank, which also had a high share of uninsured deposits, on March 10. As a result, regulators closed Signature Bank on March 12. Signature Bank was also a major bank, with $110 billion in assets at the end of 2022. Then the next domino began to fall. Depositors started withdrawing funds from First Republic. In response, five of the largest banks in the United States extended a $30 billion emergency loan to the bank on March 16. And on March 19, the Swiss investment bank UBS agreed to buy Credit Suisse, which had already been greatly weakened by the Greensill and Archegos scandals and was at risk of failing.
What does the SVB collapse mean for vendors?
Startups and the technology sector, industries already under pressure to cut costs after seeing widespread layoffs into 2023, will suffer from the collapse of SVB. SVB played an important role in financing technology companies and funding will most likely dry up with the bank gone. This means that buyers may need to play a role in financing cash-strapped companies in their own supply networks. However, this also presents an opportunity for buyers. The decline in funding will hurt startup and technology company valuations, which gives buyers an opportunity to acquire promising startups whom they have used as suppliers at bargain prices.
Other banks may also be affected, threatening them and suppliers banking with them. According to SIEPR, the average US bank has seen a 9.0% decline in the market value of its assets over the past year. Furthermore, SIEPR found that 1,600 banks in the United States would not have enough money to cover their uninsured deposits in the event of a bank run.
Further rate hikes by the Federal Reserve will result in more asset write-downs for banks. During its May 3 meeting, the Federal Reserve raised rates by an additional 0.25 percentage points, taking the fed-fund rates to a range of 5.0% to 5.25%, the highest range since 2007. More banks could face runs as this trend continues, threatening the companies that bank with them.
What lessons can procurement and suppliers draw from the SVB collapse?
The old expression “Don’t put all your eggs in one basket” is truer than ever. Having uninsured deposits is an unnecessary risk for your organization, as you cannot always expect that the Treasury and the FDIC will come to the rescue as bailouts are often politically unpopular.
Furthermore, you should research supplier financials and ensure that companies in your supply network are not putting all their eggs in one basket either. Traditional metrics of vendor financial risk may not offer a complete picture. The Altman Z-Score is a good measure of vendor financial risk, but it does not account for a company having 20.0% of its cash assets as uninsured deposits. Roku, iRhythm Technologies, and Oncorus kept over 20.0% of their cash in SVB, and much of these deposits were probably over the FDIC limit.
Buyers should also take a look at the financial condition of the banks they do business with. Banks are suppliers too, providing services such as Corporate Treasury Services, Business Credit Card Services, and Equipment Financing Services. A bank with uninsured deposits accounting for 90.0% of its assets is vulnerable to a bank run, which could jeopardize its financial health and shut it down, disrupting service availability.
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