The fintech industry experienced quite a dramatic weekend of fast-breaking news regarding the collapse of Silicon Valley Bank (SVB). By now, you’ve likely heard that the Biden administration stepped in this morning to facilitate a move that will offer SVB’s 40,000 customers full access to all of their deposits.
Banks, startups, and even tangentially related businesses are breathing a collective sigh of relief this morning. However, the move does not bring the industry back to business-as-usual. Below are four potential implications of SVB’s misstep.
FDIC Deposit Insurance to Increase
Regulators are not calling today’s move a “bailout” because the funds being used to make SVB customers whole did not come from consumer taxpayer dollars. “All depositors of the institution will be made whole,” the FDIC said in a statement. “Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.” This means that banks* will bear the responsibility to recoup these funds via increased FDIC insurance rates.
More (closer to) full reserve banks
We likely won’t see banks convert to full, 100% reserve banks (that is, banks that keep all customer reserves in cash). It is possible, however, that SVB’s failure may motivate banks to keep more consumer cash on-hand, operating closer to a full reserve bank than they previously were in order to mitigate risk. If this is the case, banks would have less funds to lend, making it difficult for consumers and businesses to get loans.
One of the first lessons taught in business school is that where there are challenges, there are opportunities. This is certainly the case here. HSBC picked up SVB’s U.K. unit for £1, and everyone from Elon Musk to JP Morgan and PNC are considering purchasing SVB’s U.S. arm. Additionally, businesses have cropped up marketing to former SVB clients, offering them working capital loans. Even Mr. Wonderful is in on the action.
Uncertainty reigns supreme
If you’ve read about SVB in the news today, it’s likely you also read about Signature Bank, which was shut down by New York state regulators on March 12, and Silvergate, which closed its doors on March 8. Combined, these events mark three U.S. bank failures in a single week. Though regulators have been quick to step in, the events have shaken investors and consumers alike.
*Interestingly enough, banks are indeed taxpayers– meaning that the responsibility for repayment technically does fall on taxpayers.