Bank run threat from SVB collapse

Broader contagion from the collapse of the second-biggest bank failure in US history could threaten the economy and tech start-up sectors.

A customer stands outside of a shuttered Silicon Valley Bank (SVB) headquarters on March 10, 2023 in Santa Clara, California. Picture: Justin Sullivan/Getty Images/AFP

Wall Street hedge fund billionaire Bill Ackman has warned bank runs in the US could start in the next few days as pressure builds on US regulators to guarantee deposits following the collapse of tech sector lender Silicon Valley Bank.

The Pershing Square Capital founder - who made billions of dollars betting that the market was misjudging the economic toll of Covid-19 - said the US government has 48 hours to fix “a soon to be irreversible mistake” should it not protect depositers. Customers with balances over $US250.000 are not covered by insurance under US rules, sparking alarm the collapse could spark broader fallout.

“Absent JP Morgan, Citi or Bank of America acquiring SVB before the open on Monday, a prospect I believe to be unlikely, or the gov’t guaranteeing all of SVB’s deposits, the giant sucking sound you will hear will be the withdrawal of substantially all uninsured deposits from all but the ‘systemically important banks’,” Mr Ackman wrote on Twitter.

SVB collapsed on Friday, the second-biggest bank failure in US history after a run on deposits thwarted the lender’s plans to raise fresh capital.

The bank - the 16th largest in the US - was a major source of lending to the tech sector and its demise is expected to crunch the start-up community, including in Australia where a number of big players held exposure for their portfolio funding.

A spokeswoman for Australia’s largest venture capital firm Blackbird told The Australian:

“SVB has been an active supporter of the Australian ecosystem for over a decade. This is a sad day for the start-up ecosystem globally.

Questions around greater contagion through to the US economy remain in the balance. Picture: Noah Berger / AFP

“Our job is to support our founders with practical solutions. Since news of the situation broke early yesterday, we have been working closely with the impacted portfolio companies to understand the extent of any exposure and to help them find solutions.

“We have also set up a forum for our founders to share their thinking and actions.”

The Tech Council of Australia said it is “closely monitoring the evolving situation.”

“We’re working with member companies, including local VC firms, to understand the extent to which Australian firms are impacted by Silicon Valley Bank being placed into receivership as some Australian companies held deposits or had loan facilities with them,” chief executive Kate Pounder said.

“We have also been working closely with the Australian government to understand the potential impact on Australian companies and their workforces.

“While many Australian tech firms did not bank with SVB or were able to transfer deposits out, we are aware that some firms have been impacted. We will coordinate with them and the government as more information on the situation becomes clearer.

“If companies have been impacted, they are welcome to contact the Tech Council.”

Silicon Valley Bank was contacted for comment.

Questions around greater contagion through to the US economy remain in the balance, according to Betashares, but the tech start-up sector looks vulnerable.

“Even if there isn’t broader contagion to the US economy, the US tech sector, especially the small cap, start up and venture space, remains vulnerable due to the outsized role SVB played in that ecosystem,” Betashares senior portfolio manager Chamath De Silva said.

“Given this was a bank largely serving companies and wealthy individuals working in technology, a very large proportion of deposits exceeded the $US250,000 deposit insurance limit. Anecdotal evidence suggests many firms will not be able to make payroll on the back of this, and even firms that do not bank with SVB might be impacted via their payroll processing company (which might be holding large cash balances at SVB).”

Getting access to new loans may also prove challenging.

“Although credit quality and loan losses weren’t the cause in this case, it’s likely that loan origination will slow down materially and we may even see deleveraging if the crisis spreads to other US regional banks. Investors may start dumping bank bonds, significantly raising their marginal cost of funding, further necessitating deleveraging.”

Capital Economics said there remained an outside risk of a hard landing.

“The circumstances of the Silicon Valley Bank collapse are unique enough that it probably won’t trigger a widespread financial contagion. Nevertheless, it is a timely reminder that when the Fed is singularly focused on squeezing inflation by jacking up interest rates – it often ends up breaking things,” the research house said.

“Regardless of whether the problems show up first in the real economy, asset markets or the financial system, they can trigger an adverse feedback loop that develops into a hard landing, which takes down all of them.”

Far-left US Congresswoman Alexandria Ocasio-Cortez said warnings “were everywhere” prior to the collapse of SVB and said the Federal Deposit Insurance Corporation - which provides insurance to depositers if banks fail - must now work through the fallout.

“The regulators were there until SVB lobbied Congress to remove the guardrails that prevent this kind of crisis in the first place.Warnings were everywhere. SVB, like many gamblers before them, knew what they were doing. Let the FDIC open the books & see what it’s working with,” Ms Ocasio-Cortez wrote on Twitter.