Isranomics

SVB’s bank run: a warning sign for Israel’s tech industry and venture capital

by | Mar 12, 2023 | Economy | 0 comments

Silicon Valley Bank, a start-up focused lender, suffered a sudden bank run last week and collapsed on Friday morning, being taken over by the U.S. federal regulators.

The bank had specialized in banking for tech start-ups since 1983 and provided financing for almost half of U.S. venture-backed technology firms. Though not very well known outside of Silicon Valley, it was ranked 16th largest in the U.S. among commercial banks with $209 billion in total assets at the end of 2022, according to officially published data.

There were several factors that caused the downfall of the bank. During the bull run and low interest rate years, SVB has been heavily investing in tech stocks. However, as the inflation spiked during 2022, the Federal Reserve begun to raise interest rates to curb the rising costs, which in turn, had a very negative impact on the bank’s financial standing. Furthermore, higher interest rates also eroded the value of long-term bonds that SVB and other financial institutions had purchased during the era of ultra-low interest rates. At the same time, start-ups were increasingly reliant on SVB for access to funds due to a lack of available venture capital. As a result, the bank was accumulating unrealized losses in bonds while customers were withdrawing their funds at an ever increasing rate.

Entrance to SVB Bank, Photo credit: Getty Images

On March 8, SVB released a statement saying it had liquidated securities at a loss and would be selling an additional $2.25 billion in new shares in order to strengthen its balance sheet. This did not bode well among some venture capital firms, which allegedly advised their clients to withdraw their funds from the bank. Unsurprisingly, SVB’s stock tanked on Thursday, which led to regulators intervening on Friday, appointing the Federal Deposit Insurance Corporation (FDIC) as receiver for the disposal of its assets. It is worth noting that, despite the FDIC covering deposits up to $250,000, 89% of the bank’s $175 billion was uninsured as of the end of last year, and therefore their future remains to be decided.

Despite the fact that the bank’s failure is a huge event for the market, with Wall Street key indices closing the day in the negative on Friday, experts do not expect a repeat of the 2008 Lehman Brothers situation.

Bill Ackman, a billionaire hedge fund investor and one of the most influential voices in the world of finance, disagrees. He predicted a run on all but the biggest banks if the government was unable to guarantee all of SVB’s deposits or if JPMorgan, Bank of America, or Citigroup did not acquire the lender. 

What about Israeli companies?

Though publicly traded companies have a limited exposure to SVB, it is the tech sector and specifically start-ups that are bearing the brunt of the financial turmoil that was unleashed on the market.

The failure of one of the largest banks in the United States, which provided financial services to over a thousand Israeli high-tech companies, may potentially cause some of them to face liquidity problems in the short term and even create some difficulty paying wages to their employees and suppliers.

With Israel’s trading week running from Sunday through Thursday, Israeli investors were quick to react to the failure of the bank. Israeli bank and insurance company shares were almost 3% lower on the Tel Aviv Stock Exchange today, March 12, 2023.

In the meantime, the major Israeli banks and Finance Ministry announced a number of solutions to assist Israeli high-tech firms, including the provision of loans and the establishment of emergency lines. Bank Hapoalim and Bank Leumi have been working virtually around the clock to help companies move the funds from SVB to accounts in Israel. According to LeumiTech, the high-tech banking arm of Bank Leumi, they have succeeded in helping their Israeli clients transfer around $1 billion to Israel.

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